The Halo Effect: Original Halo Case Remanded to District Court to Consider New Test for Enhanced Damages
Earlier in 2016, the Supreme Court of the United States issued its landmark decision in Halo Electronics v. Pulse Electronics and Stryker v. Zimmer, modifying the US Court of Appeals for the Federal Circuit’s previous standard for enhanced damages due to willful infringement (IP Update, Vol. 19, No. 6). Although the Federal Circuit has already applied this new willfulness standard in other cases (see, e.g., IP Update, Vol. 19, No. 8), in August 2016 the Federal Circuit finally issued its modified decision in Halo. On remand from the Supreme Court, the Federal Circuit vacated the district court’s willfulness determination under the previous Seagate standard and remanded that portion of the case in order to allow the district court to apply the Supreme Court’s new paradigm. Halo Electronics v. Pulse Electronics, Case Nos. 13-1472; -1656 (Fed. Cir., Aug. 5, 2016) (Lourie, J).
In the original trial, the jury found that Pulse directly infringed Halo’s patent and found it highly probably that Pulse’s infringement was subjectively willful. Applying the two-part Seagate test of assessing (1) subjective willfulness and (2) objective willfulness, the district court determined that the objective prong was lacking because Pulse’s obviousness defense at trial had been reasonable. Although the defense was ultimately unsuccessful, the district court found that the defense was not “objectively baseless.” Because the district court found that the objective component of the Seagate willfulness test was not satisfied, it declined to award enhanced damages.
In its modified decision on remand, the Federal Circuit instructed the district court to exercise its discretion in determining whether to award enhanced damages. As part of that discretion, the Federal Circuit reminded the district court to consider at least two factors in its analysis: the jury’s subjective willfulness finding, and (instead of the accused infringer’s state of mind at the time of trial) what the accused infringer knew or had reason to know at the time of infringement.
Practice Note: The Federal Circuit reached the same result in a non-precedential companion case that issued the same day as its modified decision in Halo. Innovention Toys, LLC v. MGA Entm’t, Inc., Case No. 14-1731 (Fed. Cir., Aug. 5, 2016) (Taranto, J). In that case, the Federal Circuit also instructed the district court to use its discretion, along with the jury’s finding establishing subjective willfulness, to determine if enhanced damages are warranted.
IPR Stay Factors and Explaining Preliminary Injunction Rationale
In a decision clarifying the applicable test for staying a district court case during an inter partes review (IPR), the US Court of Appeals for the Federal Circuit confirmed that district courts have broad discretion in determining what factors to consider. In addition, the Court warned that when ruling on preliminary injunction motions, district courts must explain the reasoning behind their decisions. Murata Machinery USA v. Daifuku Co., Ltd., Case No. 15-2094 (Fed. Cir., Aug. 1, 2016) (Stoll, J).
The case concerns two sets of patents related to “automated material handling systems,” which are robotic machinery installed in semiconductor manufacturing cleanrooms to manipulate the components. Murata and Daifuku both manufacture such automated systems. In September 2013, Murata initially sued Daifuku on three patents. Almost a year later, Murata sought leave to add two more patents to the case. Daifuku then filed IPRs on the three original patents and moved to stay the district court litigation.
The two parties clashed over the appropriate factors that courts should consider when deciding IPR-based motions for a stay. Both parties agreed that courts should consider (1) stage of the proceedings, (2) potential for the stay to simplify issues in the case, and (3) undue prejudice to the non-moving party or a clear tactical advantage. Murata, however, argued that courts should also consider a fourth factor: the potential for a stay to reduce the burden of litigation on the parties and the court. The district court applied Murata’s proposed test but nevertheless granted Daifuku’s stay motion. The district court also granted Murata leave to add the two new patents to the case, but noted that they would fall under the stay as well.
Murata amended its complaint to add the new patents and moved to lift the stay with respect to those patents. It also moved for a preliminary injunction based on the newly added patents. This time Murata argued against the stay based on the three-prong test, omitting the “litigation burden” factor it previously had included. The district court denied Murata’s motion to lift the stay and its motion for a preliminary injunction, but provided only cursory denial regarding its treatment of the preliminary injunction motion. Murata appealed.
The Federal Circuit affirmed the denial of the stay but remanded the preliminary injunction decision for a more detailed opinion.
With respect to the stay, the Federal Circuit agreed that the district court appropriately applied the four-factor test. Murata had argued that the district court should not have considered the fourth factor because Congress specifically included it in considerations for covered-business-method-related stays, but not for IPR-related ones. The Federal Circuit disagreed, because the power to stay a case is inherent to the district courts and is not granted by Congress. District courts therefore have discretion to consider a wide variety of factors, including the burden of litigation. The Federal Circuit also noted that Murata had previously advocated for this fourth factor, making its new position less credible.
The Federal Circuit also addressed the district court’s cursory denial of the preliminary injunction. Although the Federal Circuit did not find that such a denial was inappropriate given the stay, citing Fed. R. Civ. P. 52(a)(2), it remanded the case back to the district court for a fuller explanation of the reasoning behind the decision, noting that a district court must “state its findings and conclusions” in support of its decision to grant or deny a preliminary injunction.
PTAB Must Provide Explanation in Support of Conclusory Findings
Addressing the obligation of the Patent Trial and Appeal Board (PTAB or Board) to articulate “logical and rational” reasons for its conclusions, the US Court of Appeals for the Federal Circuit remanded a portion of a PTAB inter partes review decision for additional explanation to support conclusory findings in the final written decision. In re: Warsaw Orthopedic, Inc., Case Nos. 15-1050; 1058 (Fed Cir., Aug. 9, 2016) (Wallach, J).
The patent at issue in this case relates to a method of spinal surgery that “insert[s] an artificial implant between two adjacent vertebrae” from a patient’s side. This lateral approach to spinal surgery aims to avoid complications that may arise when the surgery is performed from the front or back of a patient. After the PTAB found that two independent claims of the patent at issue would have been obvious over a combination of three prior art references, Warsaw appealed.
Warsaw made three arguments on appeal:
- The PTAB misinterpreted one of the three references relied on for its obviousness determination because the reference does not disclose dimensions that meet the claim limitation “substantially the full transverse width” in two of the representative claims.
- The PTAB erred in its motivation to combine analysis by relying on reasoning of what a person having ordinary skill in the art “could” have been motivated to do instead of what such a person “would” have been motivated to do.
- The PTAB did not adequately explain how one of the references (Jacobson) disclosed a key limitation of one of the patent’s independent claims.
The Federal Circuit affirmed the PTAB’s decision on the first two issues. The Court explained that “[o]bviousness does not require the prior art to reach expressly each limitation exactly,” and pointed out that the PTAB determined that a person having ordinary skill in the art “would have” been motivated to combine the three prior art references, and provided a reasoned explanation for reaching that conclusion.
Addressing Warsaw’s third argument—that the PTAB did not adequately explain how the Jacobson reference disclosed the claimed “elongated portions” limitation—the Federal Circuit agreed with Warsaw. The Court found that the PTAB’s single conclusory sentence finding that Jacobson disclosed the subject limitation failed to meet the PTAB’s independent obligation to make an administrative record of its findings based on “logical and rational” reasoning. The Court noted that if, on appeal, it can follow the logic of the PTAB ruling, it may affirm “even if that path is less than perfectly clear.” In this case, the Federal Circuit could not reasonably discern that the PTAB’s decision as to the “elongated portions” limitation followed the proper path, and remanded this issue to the PTAB for additional explanation.
Practice Note: The PTAB is required to articulate “logical and rational” reasons for its decisions; conclusory statements with inadequate explanation provided in support are insufficient.
Exclusive Recitation of Specific Device in Specification Limits Claim Term
Addressing issues of claim construction, the US Court of Appeals for the Federal Circuit affirmed a limiting construction of a claim term where the specification exclusively used the disputed term in the limited fashion. GPNE Corp. v. Apple Inc., Case No. 15-1825 (Fed. Cir., Aug. 1, 2016) (Prost, J).
GPNE brought suit against Apple for allegedly infringing two patents relating to a two-way paging system capable of receiving and sending messages. All of the patent claims refer to the devices on the network as “nodes” and are otherwise silent as to the type of device a “node” may be. The central dispute was the court’s construction of the claim term “node” as a “pager with two-way data communications capability that transmits wireless data communications on a paging system that operates independently from a telephone network.” GPNE argued that a “node” should be broadly construed as a “device in a network that can transmit and receive information.” Apple argued that the term should be limited to a “pager in a network operating independently of a telephone network.” The district court agreed with Apple, and the jury ultimately issued a verdict that the patents were valid but not infringed. GPNE appealed.
GPNE argued that the district court’s construction of the term “node” was erroneously limited to “pagers.” GPNE argued that the specification contained a broader description of “nodes,” but except for the abstract, the patent specification did not use the term “node” and instead referred to the devices as “pagers” or “paging units.” Based on the principle that the words of a claim are generally given their ordinary and customary meaning in the context of the claims and the specification, the Federal Circuit found that the specification repeatedly and exclusively used the words “pager” and “pager units” to refer to the devices in the patented system.
GPNE also argued that principles of claim differentiation counsel against construing a “node” as a “pager,” because the parent of the patents at issue claimed both a “paging system” and a “paging unit.” The Federal Circuit again disagreed, finding that the claims GPNE cited for its claim differentiation argument differed in more ways than just their use of the terms “node” and “pager.” Thus, the Court found that the inference of claim differentiation between the parent and asserted patent claim was weak at best, and that it was proper for the district court to characterize a “node” as a “pager.”
GPNE also argued that the construction of the “node” as operating independently of a telephone network was improper based on a single sentence of the specification. The Federal Circuit found the construction proper, as the single sentence relied upon was a summation sentence that describes “the invention” as a whole.
Finally, GPNE argued that the district court’s failure to provide a construction of the term “pager” improperly left an issue of claim construction for the jury in violation of the Federal Circuit rule laid down in O2 Micro (IP Update, Vol. 16, No. 9). But, as the Federal Circuit explained, the duty to construe claims is not without limits. In this case, the district court resolved the question of claim scope by construing the term “node” and was under no obligation to address other potential ambiguities (such as the meaning of the term “pager”). As the Court observed, only claim terms that are in dispute must be construed and even then, only to the extent necessary to resolve the dispute.
Generalized Common Sense Allegations Cannot Be Used to Supply Important Missing Claim Limitation
Addressing the use of common sense for an obviousness analysis, the US Court of Appeals for the Federal Circuit held that conclusory statements about common sense cannot be used to supply missing claim limitations that play a major role in the claimed subject matter. Arendi SARL v. Apple Inc., et al., Case No. 15-2073 (Fed. Cir., Aug. 10, 2016) (O’Malley, J).
Arendi sued Apple, Google and others for infringement of its patent on detecting certain types of information in a document and searching external data sources for related information. The defendants filed a petition for inter partes review (IPR), and the US Patent and Trademark Office (PTO) instituted review on an obviousness ground based on a single prior art reference. That prior art detected phone numbers in a document and saved them to an external database, but did not conduct any searches using the detected phone number. The defendants asserted that it would have been common sense to first search the database for the phone number to avoid creating duplicate entries. The PTO’s Patent Trial and Appeal Board (PTAB or Board) agreed and found the claims unpatentable. Arendi appealed.
On appeal, the Federal Circuit addressed the permissible use of common sense for an obviousness analysis. It first noted that common sense is typically used to provide a motivation or rationale to combine rather than to supply a missing claim limitation. The Court then considered two of its apparently conflicting prior opinions on using common sense to supply missing claim limitations.
In Perfect Web (IP Update, Vol. 12, No. 12), the Court blessed an obviousness holding where common sense was used to supply a missing claim step. But the Federal Circuit characterized that missing step as unusually simple in a particularly straightforward technology, and stated that Perfect Web should be considered an exception rather than the rule.
In Hear-Wear (IP Update, Vol. 17, No. 6), the Court affirmed the rejection of an argument that common sense supplied a missing structural claim element. The Federal Circuit in Hear-Wear found that conclusory assertions without record evidence cannot be used to establish “core factual findings,” such as missing claim elements. Here, the Court reiterated that a common sense position cannot be used as a wholesale substitute for reasoned analysis and evidentiary support.
The PTAB’s decision appeared to parse these cases as barring the use of common sense to supply structural claim elements (as in Hear-Wear) but not claim steps (as in Perfect Web). The Federal Circuit ignored that distinction and instead held that the question of whether common sense can supply a missing claim limitation turns on whether the limitation is important, i.e., plays a major role in the claimed subject matter and, if missing, would leave the claims almost devoid of content. The Court concluded that the claim limitation at issue—searching an external data source using the information detected in the document—was important and thus could not be satisfied by the conclusory common sense assertions in the record. The Federal Circuit consequently reversed the PTAB’s unpatentability decision.
PTAB Refusal to Permit Claim Amendments Remanded
Addressing the standard for granting a motion to amend claims in inter partes review (IPR), the US Court of Appeals for the Federal Circuit rejected a conclusion by the Patent Trial and Appeal Board (PTAB or Board) that the patent owner must show that newly added claim features were not independently known in the prior art. Veritas Techs. LLC v. Veeam Software Corp., Case No. 15-1894 (Fed. Cir., Aug. 30, 2016) (Taranto, J).
The patent at issue relates to computer systems and methods for performing restores from backups while applications are active and accessing the data being restored. Veeam challenged the claims of the patent in an IPR and argued that the claims were invalid as being obvious in view of a combination of prior art references. The primary reference disclosed a block-level restoration system that uses two channels to provide an application on-demand access to lost data blocks while the lost data blocks are being restored.
After the PTAB instituted trial, Veritas filed a conditional motion to add two new claims if the PTAB found the existing claims to be unpatentable. Veritas argued that the new claims recited more expressly what Veritas was urging as the proper construction of the existing claims. In particular, the new claims related to a “file-level” data restoration, rather than a broader “block-level” restoration, as recited in the existing claims. Veritas argued that the newly added features specific to “file-level” restoration, in combination with other known features, were not in the prior art.
Applying the broadest reasonable interpretation standard, the PTAB declined Veritas’s proposed claim construction and canceled the existing claims upon finding them to be obvious in view of the prior art. The PTAB also denied Veritas’s motion to amend, stating that Veritas had failed to address whether each newly added feature in each proposed claim, as distinct from the claimed combination of features, was independently known in the prior art. Veritas appealed.
On appeal, the Federal Circuit affirmed the PTAB’s claim construction and finding that the existing claims were obvious. However, the Court vacated the PTAB’s denial of the motion to amend, stating that it was arbitrary and capricious in requiring Veritas to show that the newly added features were not separately known in the prior art. The Court noted that novel and non-obvious inventions often are only a combination of known individual features. Thus, the failure to show that the newly added features were not independently known should not have been fatal to the motion to amend. The case was remanded.
Practice Note: The Federal Circuit noted that the PTAB’s rationale was erroneous independent of any resolution of the pending en banc proceeding in In re: Aqua Products (IP Update, Vol. 19, No. 8). Going forward, when claim amendments are proposed in an IPR, patent owners and petitioners should focus non-obviousness and obviousness arguments on the proposed combination of claim features, rather than solely on the newly added features.
Army Ammunition Goes Green and Infringement Free
In a patent infringement action against the US Army for its use of lead-free “green bullets,” the US Court of Appeals for the Federal Circuit concluded that the trial court erred in broadly construing a term of degree and the open-ended term “including.” Liberty Ammunition, Inc. v. United States, Case Nos. 15-5057; -5061 (Fed. Cir., Aug. 26, 2016) (Stoll, J).
This case stems from the US Army’s “green bullet” initiative from the 1990s and 2000s to eliminate lead from military ammunition. Prior to the development of so-called green bullets, the Army’s standard-issue ammunition was the M855 bullet. In response to the Army’s green initiative, a civilian engineer, P.J. Marx, developed and patented a lead-free bullet supposedly with the same lethality as the M855.
After signing a non-disclosure agreement (NDA) with an Army official, Marx provided the Army with technical information and sample rounds of his bullets. Ultimately, however, the Army declined Marx’s bullets. In 2010, the Army announced the development of its own green bullet, the M855 A1. Subsequently, Liberty Ammunitions, the assignee of Marx’s patent, sued the US government in the US Court of Federal Claims for patent infringement under 28 USC § 1498 and breach of the NDA. Section 1498 waives the government’s sovereign immunity “[w]henever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same.”
After construing the disputed claim terms, the trial court held a bench trial and concluded that the government infringed the asserted claims. The trial court rejected the government’s construction of the claim terms “reduced area of contact” and “intermediate opposite ends.” The trial court construed the claim term “reduced area of contact” to mean that “the area of contact between the interface and the rifling of the firearm is less than that of a traditional jacketed lead bullet of calibers .17 through .50 BMG.” The government argued that this construction improperly used a range of calibers instead of the conventional M855 bullet as a baseline comparison. Further, the trial court rejected Liberty’s breach of contract claim, finding that the Army official who signed the NDA on the government’s behalf lacked authority to do so, rendering the NDA unenforceable. Both parties appealed.
In applying Phillips principles of claim construction, the Federal Circuit concluded that the disputed term “reduced area of contact” was one of degree and thus necessarily called for a comparison against a baseline. The M855 was the only prior art bullet disclosed in the patent specification, “strongly suggesting that the M855 round is the point of comparison for the claims.” Instead of using the M855 as a baseline, the trial court relied on a discussion in the patent specification of how the invention was enabled for “all calibers generally ranging from .17 through [.]50 BMG.” As the Federal Circuit explained, this was error because such a construction did not meet the “objective boundaries” standard for construing terms of degree. The Federal Circuit further explained that discussions in the patent specification of conventional bullets, such as the M855, and range of calibers were “distinct concepts,” and that the trial court erred in linking these distinct concepts in its claim construction.
The government also appealed the construction of the claim term “intermediate opposite ends.” Because the term “including” preceded the term “intermediate opposite ends,” the trial court concluded that the claimed “interface” may cover more than just the middle portion of the claimed bullet and could extend all the way to the front or end of a bullet. The government argued that the proper construction of this term should be limited so that the “interface” does not extend all the way to the front or end of a bullet.
The Federal Circuit agreed with the government, explaining that the trial court “significantly diminishes the ‘intermediate opposite ends’ limitation, almost to the point of rendering it a nullity.” The Federal Circuit reiterated its prior warning against using open terms, such as “comprising” or “including,” as “weasel word[s] with which to abrogate claim limitations.”
The Federal Circuit construed the term “intermediate opposite ends” to mean that “the interface is positioned between the front end and the rear end of the projectile body such that the interface does not extend all of the way to the front end or to the rear end of the projectile.” Based on the correct claim construction, the Federal Circuit reversed the trial court’s finding of infringement.
The Court also affirmed the trial court’s determination that the NDA was unenforceable for lack of implied actual authority. Judge Newman dissented from this aspect of the decision on the ground that the record contained sufficient evidence that the Army official had implied actual authority to sign the NDA.
Once Again, Written Description Does Not Limit Claim Scope **WEB ONLY**
Addressing the interplay between the written description and claim construction, the US Court of Appeals for the Federal Circuit reversed the district court, finding that the specification did not clearly limit the scope of the invention in a way that invalidated the broader claims. Scriptpro, LLC v. Innovation Associates, Inc., Case No. 15-1565 (Fed. Cir., Aug. 15, 2016) (Moore, J).
Scriptpro sued Innovation alleging infringement of its patent directed to a collating unit for storing containers of dispensed prescription medication. Innovation twice moved for summary judgment, arguing that the claims omitted an essential feature and thus lacked adequate written description under 35 USC § 112. The district court granted the first motion, and Scriptpro successfully appealed (IP Update, Vol. 17, No. 9). On remand, Innovation moved for summary judgment that the claims lacked a different essential feature. The district court again granted the motion, and Scriptpro appealed.
In the second appeal, Innovation argued that the district court correctly held that the specification unambiguously limited the invention to storage of prescription containers based on patient-identifying information, while the claims were much broader and thus not commensurate with the invention. The Federal Circuit disagreed, finding that the specification and the original claims suggest sorting and storing containers based on factors other than patient-identifying information. While the Court acknowledged that much of the specification focused on patient-identifying information, it explained that “a specification’s focus on one particular embodiment or purpose cannot limit the described invention where that specification expressly contemplates other embodiments or purposes.” In this case, the specification described multiple purposes for the invention: “[n]ot every claim must contain every limitation or achieve every disclosed purpose.” Similarly, the Court found that describing an aspect of a prior art system as “inconvenient” does not rise to the level of “disparagement” sufficient to limit the described invention, in particular where some embodiments of the invention include the same aspect.
Finally, the Court noted that the patent’s express disclosure of various ways to sort and store containers distinguished this case from ICU Medical (IP Update, Vol. 12, No. 3) and Gentry Gallery, where the specifications clearly limited the scope of the inventions in ways that the claims clearly did not. Accordingly, the Court again reversed the district court’s grant of summary judgment and remanded for further proceedings.
PTO Must Apply Phillips Standard when Construing Expired Patents **WEB ONLY**
In an opinion addressing the standard for claim construction of a patent that expires during reexamination, the US Court of Appeals for the Federal Circuit upheld the Patent Trial and Appeal Board’s (PTAB’s or Board’s) decision finding all challenged claims invalid, but found that the PTAB had used the incorrect standard for its claim construction. In re: CSB-System Int’l, Inc., Case No. 15-1832 (Fed. Cir., Aug. 9, 2016) (Stoll, J).
CSB is the owner of a patent directed to a circuit arrangement for integrating an electronic data processing system with telephone systems connected to an integrated services digital network telephone network. A third party successfully petitioned for ex parte reexamination of the patent. During the resulting reexamination proceeding, the examiner construed several claim terms, applying the broadest reasonable interpretation (BRI) standard for the terms “personal computer” and “LAN server,” and, using these constructions, rejected the challenged claims. The PTAB affirmed. CSB appealed, arguing that the PTAB applied the incorrect standard in construing the claims.
The Federal Circuit agreed with CSB that the PTAB should have applied the Phillips standard rather than the BRI standard because the patent expired during the reexamination. While claims are normally construed under the BRI standard in US Patent and Trademark Office proceedings, because an expired patent can no longer be amended to preserve its validity, its claim terms should be construed under the narrower Phillips standard used in district courts.
The Federal Circuit, however, found that there was no basis for limiting the claims as narrowly as CSB argued. For instance, the Court found there was no support for limiting the claim term “personal computer” to exclude personal computers running software to emulate terminals, nor did the term “LAN server” require embellishment beyond its plain meaning.
Thus, the Federal Circuit concluded that the claim construction applied was correct even under the Phillips standard, and affirmed the PTAB’s rejection of all claims.
Corrected Inventorship Leads to Loss of Standing to Pursue Infringement Case
Addressing inventorship and waiver issues, the US Court of Appeals for the Federal Circuit affirmed the district court’s decision to add two joint inventors to a patent, explaining that even those who contribute only to a single claim, or to one aspect of a single claim, are inventors. Vapor Point LLC v. Moorhead, Case Nos. 15-1801; -2003 (Fed. Cir., Aug. 10, 2016) (per curium) (O’Malley, J, concurring).
Vapor Point and individuals Keith Nathan and Kenneth Matheson (collectively, Vapor Point) brought suit against NanoVapor Fuels and individuals Elliott Moorhead and Bryant Hickman (collectively, NanoVapor) seeking to add Nathan and Matheson as joint inventors on two of NanoVapor’s patents. Specifically, Vapor Point alleged that NanoVapor hired both Nathan and Matheson to reengineer and develop a commercial embodiment of the system claimed in the NanoVapor patents at issue, and that NanoVapor filed these patents without consent, notice or compensation. NanoVapor countersued Vapor Point, arguing (among other things) that Vapor Point infringes the two NanoVapor patents.
Both sides also asserted various state law claims. In response to Vapor Point’s state law claims, NanoVapor asserted a number of defenses, including that Vapor Point had an obligation to assign the two NanoVapor patents to NanoVapor. Both sides later voluntarily nonsuited their respective state law claims, representing that only issues of infringement and inventorship remained.
After a four-day evidentiary hearing, the district court granted Vapor Point’s claims of inventorship and dismissed the action. With respect to the infringement claim, because NanoVapor did not join Nathan and Matheson (now deemed to be inventors), NanoVapor did not have standing to pursue this claim.
NanoVapor appealed to the Federal Circuit, arguing that the district court erred in its determination of inventorship and improperly dismissed the action without deciding whether Vapor Point had an obligation to assign the patents to NanoVapor.
With respect to inventorship, the Federal Circuit reiterated that all inventors, even those who contribute only to a single claim or one aspect of a single claim, must be listed on any patent including such a claim. Indeed, joint inventors need not physically work together or make the same type or amount of inventive contribution. Here, the Federal Circuit found substantial evidence that Nathan and Matheson each contributed to at least one aspect of the patented invention. Accordingly, the Federal Circuit agreed with the district court that Nathan and Matheson should properly be named inventors on the NanoVapor patents.
The Federal Circuit also agreed that NanoVapor waived its right to ask the district court to determine whether Vapor Point had an obligation to assign the patents to NanoVapor. In this case, NanoVapor asserted that Vapor Point had an obligation to assign only as an affirmative defense to Vapor Point’s state law claims, which were voluntarily dismissed with prejudice. After dismissal, the only remaining claims from Vapor Point’s complaint were related to inventorship. As the parties agreed, determinations of inventorship and ownership are separate issues, and ownership is not an affirmative defense to inventorship. Accordingly, voluntary dismissal of the state law claims mooted NanoVapor’s equitable defense that Vapor Point had an obligation to assign. The Federal Circuit further noted NanoVapor’s affirmative representation that resolution of the inventorship issue would dispose of the infringement issue, which amounted to a waiver of any assertion of ownership of Vapor Point’s rights.
Judge O’Malley wrote a separate concurrence to note that, regardless of whether NanoVapor waived its right to assert ownership by assignment in the two NanoVapor patents, NanoVapor would nevertheless have lacked standing to maintain an infringement action, because it had no written assignment from either Nathan or Matheson. O’Malley advocated for strict adherence to 35 USC § 261 and noted that any precedent holding that such an “in writing” requirement could be ignored must be rejected. O’Malley also acknowledged that patent ownership may be transferred by operation of law, such as by way of inheritance, but that such transfers are not “assignments” under § 261. Moreover, although state law principles may give rise to shop rights and implied-in-fact contracts, these are also not “assignments” pursuant to § 261 and may only be used as a defense against infringement. In this case, NanoVapor conceded that it had no executed written instrument requiring assignment from either of Nathan or Matheson—NanoVapor apparently drafted multiple employee agreements, but none were signed. Accordingly, any possible equitable claim of patent ownership held by NanoVapor was insufficient to permit NanoVapor to assert its infringement claim, regardless of waiver.
Federal Patent-Agent Privilege Not Recognized in Texas State Courts
Finding that Texas state courts lacked authority to recognize common-law discovery privileges, the Texas Court of Appeals for the Fifth District refused to recognize the US Court of Appeals for the Federal Circuit’s recently adopted “patent-agent privilege” for communications with a non-lawyer patent agent relating to patent prosecution. In re Silver, Case No. 05-16-00774 (Tex. App., Aug. 17, 2016 ) (Stoddart, J) (Evans, J, dissenting).
The original proceeding involved a contract dispute relating to a patent purchase agreement. As part of that proceeding, the defendant requested that the patent owner and inventor, Andrew Silver, produce communications that included approximately 300 emails between Silver and his patent agent. The email communications fell within two categories: those relating directly to patent prosecution, and others relating to the merits of the underlying litigation, but not patent prosecution. Silver argued that all of the emails were properly withheld as privileged in view of the Federal Circuit’s recognition of a patent-agent privilege in In re: Queen’s University at Kingston (IP Update, Vol. 19, No. 4). The defendant disagreed and sought an order compelling production. Finding that it lacked authority to recognize common-law discovery privileges under Texas law, the trial court ordered production of all the withheld emails.
The Texas Appeals Court agreed with the trial court’s analysis, explaining that because the substance of the underlying dispute was not based on issues of federal patent law, the Federal Circuit’s Queen’s University holding was not binding on the Texas state courts. The Court further noted that whereas the federal rules of evidence specifically permit federal courts to determine new discovery privileges, the only privileges recognized in Texas are those grounded in the Texas Constitution, statutes, the Texas Rules of Evidence and other rules established pursuant to statute. For these reasons, the Court denied the relator’s mandamus petition seeking relief from an order requiring production of all communication between an alleged inventor and his patent agent.
The dissent credited Silver’s argument that Rule 503 of the Texas Rules of Evidence provides authority for recognizing the patent-agent privilege and, as a result, the patent-agent privilege was not properly characterized as a common-law discovery privilege. According to the dissent, Rule 503 (Lawyer-Client Privilege) defines a lawyer as “a person authorized . . . to practice law in any state or nation.” Relying on the same Supreme Court of the United States authority cited in Queen’s University, the dissent found that a patent agent is a person authorized to practice law for the limited purpose of preparation and prosecution of patent applications in the United States. As a result, the dissent found that the Texas court had discretion to recognize a patent-agent privilege, but lacked discretion to recognize that patent agents were authorized to practice law for a limited purpose. The dissent would have permitted the plaintiff to withhold the communications related directly to patent prosecution, but not those relating to the merits of the underlying litigation.
The dissent further noted that recognition of the patent-agent privilege would promote uniformity in state and federal court litigation and warned that a contrary decision might encourage satellite state court litigation as an opportunity to discover such communications privileged from discovery in federal court patent litigation.
Practice Note: A plaintiff’s “well-pleaded complaint” determines whether federal jurisdiction is properly invoked. Plaintiffs who may be affected by a state court’s refusal to recognize a patent-agent privilege may have the opportunity to structure their complaint so as to invoke federal court jurisdiction. Many considerations typically influence whether a plaintiff brings a case in a state or federal court. Defendants may remove any claim for relief “arising under any Act of Congress relating to patents” under 28 USC § 1454, but that provision requires remand of state law claims (e.g., “pure” contract claims) where no supplemental jurisdiction otherwise exists. Upon remand, simultaneous litigation in both federal and state courts may result.
Unwrapping the Meaning of Markush Group Language
Addressing issues of claim construction for a Markush group, the US Court of Appeals for the Federal Circuit reversed-in-part a district court “closed” Markush group claim construction and vacated its summary judgment of non-infringement. Multilayer Stretch Cling Film Holdings, Inc. v. Berry Plastics Corp., Case Nos. 15-1420; -1477 (Fed. Cir., Aug. 4, 2016) (Dyk, J) (Taranto, J, dissenting in part).
Multilayer and Berry Plastics are two leaders in the plastic film industry, specifically with regard to multilayered plastic cling wrap films. Multilayer alleged infringement of its patent directed to multilayered thermoplastic stretch wrap films that cling to themselves and are used to wrap boxes, furniture and other items. The claimed invention relates to plastic films that have at least seven individual layers in the film composition and offer acceptable cling performance, good balance of strength and good elongation properties. The layers of the film are distinguished by their structure: the films contain two outer layers and at least five inner layers, each of which is compositionally distinct from its direct neighboring layer. The outer layers contribute moderate to high controlled cling, whereas the inner layers assist in mechanical strength and stretchability.
The claim term in issue related to the inner layers and recited:
. . . five identifiable inner layers, with each layer being selected from the group consisting of linear low density polyethylene, very low density polyethylene, ultra low density polyethylene, and metallocene-catalyzed linear low density polyethylene resins . . . .
The district court concluded that each inner layer “must contain only one class of [the listed] resin(s),” thereby excluding blends of more than one type of resin and all unlisted resins. On the basis that the accused films included (in their inner layers) blends of classes of resins from the “closed” Markush group as well as resins not included in the Markush group, the district court found, on summary judgment, that Berry’s products did not infringe. Multilayer appealed.
On appeal, the Federal Circuit was asked to consider two questions relating to the Markush group claim language: (1) whether the claimed Markush group was closed to resins other than the four listed, and (2) whether the claimed Markush group was closed to blends of the four listed resins. The Court explained that a Markush group claim is a particular kind of claim element that lists alternative species or elements that can be selected as part of the claimed invention. Thus, Markush group claim language creates a customized “group” that lists specified alternatives included in the claim element. Such groups are typically recited in the following form: a member selected from the group consisting of A, B and C. The Court agreed that the claim element in issue here created a Markush group that listed four types of resins that are understood to be alternatively useable for preparing inner layers for the claimed film.
With respect to whether the claimed Markush group was closed, the Federal Circuit agreed with the district court that the group was limited to only the four listed resins. Relying on well-established precedent, the Federal Circuit determined that the use of the transitional phrase “consisting of” created a strong presumption that the claim element was “closed” and excluded any elements not specified in the claim, notwithstanding that the specification and dependent claims describe or recite unlisted resins for use in the inner film layers. Disagreeing with the majority, the dissent argued that it is the “layer,” not the “resins” or “materials,” that must be selected from the group of listed resins. Therefore, since “layers” are composed of things and are physical structures characterized by a spatial relationship to some other physical element, the “layer” does not “have to be one or more of the listed species of resin.”
With respect to the question of whether the Markush group was closed to blends of the four listed resins, the panel unanimously determined that the district court erred. The Federal Circuit explained that the “closed” language presumption that relates to the term “consisting” can be overcome by a combination of other claim language and the specification. The Court determined that the Markush group here was open to blends of the four listed resins, relying on the fact that the specification “repeatedly and consistently references blends in describing any and all resins,” including those of the claim element in question. Moreover, the specification and prosecution history discuss the importance of blending the resins in order to achieve desired physical and mechanical properties.
The Federal Circuit therefore reversed the summary judgment finding of non-infringement with instructions to determine, on remand, if the use of blended resins in the inner layers of the accused product were infringements.
Claim Differentiation Doctrine Does Not Overcome Construction Dictated by Written Description or Prosecution History **WEB ONLY**
Addressing the application of the claim differentiation doctrine in claim construction, the US Court of Appeals for the Federal Circuit affirmed the district court’s construction, finding that the doctrine of claim differentiation cannot overcome “a contrary construction dictated by the written description or prosecution history.” Wi-LAN USA, Inc. v. Apple Inc., Case No. 15-1256 (Fed. Cir., Aug. 1, 2016) (Chen, J).
Wi-LAN filed a patent infringement suit against Apple alleging that Apple’s iPhone operating on a 4G network infringed two of Wi-LAN’s patents. The patents generally cover enhancing wireless network efficiency by utilizing intermediary nodes between network base stations and user devices. Wi-LAN argued that Apple’s iPhones were covered by the patents because the claimed “intermediary node” mapped onto the baseband processor in Apple’s phone, which handles communications with the 4G network, and the claimed “user device” mapped onto the phone’s application processor, which runs applications on the phone.
At issue was the construction of the terms “specified connection” and “UL connections.” Apple argued that these terms referred to the connection between the user devices and intermediary devices, and that the claims should be construed to only cover systems where multiple user devices were connected to a single intermediary node. Wi-LAN argued that the disputed terms either did not require multiple user devices connected to a single intermediary node or were referring to the connection between the intermediary node and the network base station, not the connection between user devices and the intermediary node. Wi-LAN also argued that the doctrine of claim differentiation precluded the district court from adopting Apple’s constructions. Ultimately, the district court adopted Apple’s constructions and granted Apple summary judgment of non-infringement. Wi-LAN appealed.
The Federal Circuit affirmed the district court’s constructions and grant of summary judgment of non-infringement. First, the Court looked to the specification of the patent to determine whether the patent covered system architectures where the intermediary node only connected to a single device. The Court noted that, according to the specification, “each [intermediary] node . . . serv[es] multiple connections for users” and that every relevant figure from the patents discloses multiple users connected to a single intermediary node. The Court also focused on the claim requirement of “allocating bandwidth based on a specified connection’s priority.” Here, the Court held that “to ‘allocate’ something is to distribute it among multiple recipients” and that “priority is a relative concept: a specified connection only has a ‘priority’ in comparison to other specified connections’ priorities.” The Court further explained that the disputed terms must necessarily refer to the connection between the user devices and intermediary nodes in order for the claims to match the “scheme” and “architecture” disclosed in the specification and prosecution history. Finally, the Court rejected Wi-LAN’s claim differentiation arguments, noting that claim differentiation cannot overcome “a contrary construction dictated by the written description or prosecution history.”
Double-Checking Alice Using Common-Sense Distinctions Between Ends and Means
Following its decision in Enfish (IP Update, Vol. 19, No. 6), the US Court of Appeals for the Federal Circuit provided additional guidance on determining whether a patent claim includes an inventive concept, thereby rendering it patent eligible under the Supreme Court of the United States’ Alice decision (IP Update, Vol. 17, No. 7). Electric Power Group, LLC, v. Alstom S.A., Case No. 15-1778 (Fed. Cir., Aug. 1, 2016) (Taranto, J). Specifically, the Federal Circuit explained “one helpful way of double-checking” the patentability of patent claims under Alice by “invoking an important common-sense distinction between ends sought and particular means of achieving them, between desired results (functions) and particular ways of achieving (performing) them.”
The dispute in Electric Power centered on the eligibility of three patents owned by Electric Power. The patents describe and claim systems and methods for performing real-time performance monitoring of an electric power grid by collecting data from multiple data sources, analyzing the data and displaying the results. The district court evaluated a representative claim under the two-prong test of Alice. The first part of the Alice inquiry looks at the “character” of the claim as a whole to see if it is directed to an abstract concept. The second part (if reached) looks more precisely at what the claim elements add—that is, whether they limit the claim to an “inventive concept.”
The Federal Circuit agreed with the district court that the asserted claims were directed to “the abstract idea of monitoring and analyzing data from disparate sources.” The Federal Circuit has previously recognized in Content Extraction (IP Update, Vol. 18, No. 1) and Ultramercial (IP Update, Vol. 16, No. 7) “that merely presenting the results of abstract processes of collecting and analyzing information, without more (such as identifying a particular tool for presentation), is abstract as an ancillary part of such collection and analysis” and not patent-eligible subject matter. Unlike the claims in Enfish, which involved improvements to computer functionality where the computer serves as a tool, the asserted claims were focused on independently abstract ideas that use computers as tools. The Federal Circuit noted that merely limiting such claims to a particular technological environment, such as power-grid monitoring, is insufficient to transform the claims into a patent-eligible application of the abstract ideas. Indeed, there was nothing new about the asserted claims: “The claims in this case do not even require a new source or type of information, or new techniques for analyzing it.”
Turning to the second part of the Alice inquiry, the Federal Circuit concluded that the asserted claims “lack[ed] an inventive concept in the application of that abstract idea.” The Court observed that the claims’ “invocation of computers, networks, and displays” was insufficient because the claims at issue required neither “nonconventional computer, network, or display components” nor “non-conventional and non-generic arrangement of known, conventional pieces.” The asserted claims merely called for performance on a set of generic, off-the-shelf computer components and display devices. Accordingly, the asserted claims were found to claim patent-ineligible subject matter. Notwithstanding the impressive length of the claims, the Court found that they did “not go beyond requiring the collection, analysis, and display of available information in a particular field, stating those functions in general terms, without limiting them to technical means for performing the functions that are arguably an advance over conventional computer and network technology. The claims, defining a desirable information-based result and not limited to inventive means of achieving the result, fail under § 101.”
The Federal Circuit agreed with the district court’s reasoning that “there is a critical difference between patenting a particular concrete solution to a problem and attempting to patent the abstract idea of a solution to the problem in general,” but made clear that the difference was just “one helpful way of double-checking the application of the Supreme Court’s [Alice] framework to particular claims” because “claims [that are] so result-focused, so functional, as to effectively cover any solution to an identified problem” preempt innovation.
America Invents Act
CBM Review Denied for Technological Invention Directed to Financial Product **WEB ONLY**
The Patent Trial and Appeal Board (PTAB or Board) may deny covered business method (CBM) review if the challenged patent is for a technological invention, even if it is directed at a financial product or service. Sally Beauty Holdings, Inc. v. Intellectual Ventures I LLC, Case No. CBM2016-00030 (PTAB, Aug. 2, 2016) (Turner, APJ).
Section 18 of the America Invents Act provides for a transitional program for reviewing CBM patents. A CBM patent is a patent that “claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.” Within this definition of a CBM patent, the PTAB has broadly interpreted the phrase “financial product or service” based on the legislative history. In particular, the legislative history explains that the phrase is intended to encompass a patent that claims activities that are “financial in nature, incidental to a financial activity or complementary to a financial activity.”
Here, the PTAB first found that the patent at issue relates to a financial product or service because the specification of the patent discloses examples of relating to “bank account records, 401k account information, and credit card balance information.” Although the petitioner primarily based its analysis on claims that the patent owner disclaimed, the PTAB still found that the specification makes it clear that the non-disclaimed claims relate to a “financial product or service.”
The PTAB found that the challenged patent was a technological invention, however, because the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art and solves a technical problem using a technical solution. The petitioner only argued that a single disclaimed claim was directed at unpatentable subject matter under 35 USC § 101. Although the petitioner only analyzed a single disclaimed claim, the PTAB did not dismiss the petition in its entirety. Instead, the PTAB analyzed the arguments that were made by the petitioner and evidence presented to determine if the arguments were sufficient with respect to the remaining claims. After completing this analysis, the PTAB rejected the petitioner’s arguments and found that the petitioner failed to consider the claims as a whole, as required by § 101. Therefore, the PTAB declined to institute CBM review.
Post-Grant Review May Be Used to Invalidate Patents Directed to Patent-Ineligible Subject Matter
Addressing patent-eligible subject matter issues, the Patent Trial and Appeal Board (PTAB or Board) issued a final written decision in a post-grant review (PGR) finding all claims of a newly issued patent unpatentable under 35 USC § 101. Netsirv v. Boxbee, Inc., Case No. PGR2015-00009 (PTAB, Aug. 2, 2016) (Saindon, APJ).
Netsirv filed a petition requesting PGR of all claims of an America Invents Act (AIA) patent directed to storage container tracking and delivery in the physical storage field. The PTAB instituted the PGR solely to determine whether the claims were unpatentable as being directed to patent-ineligible subject matter under § 101.
Under the Alice framework, the PTAB first determined that the claims were directed to an abstract idea: a bailment scheme using storage containers. The PTAB found that such bailment schemes have long been a prevalent economic practice and constitute an abstract idea. The PTAB also acknowledged the Enfish case (IP Update, Vol. 19, No. 6), which explained that not all claims directed to improvements in computer-related technology are abstract, but found that because the claims merely used the computer as a tool and were not directed to the functionality of the computer itself, it was proper to proceed to the second step of the Alice test.
Under the second step, the PTAB analyzed the claims to determine whether they recited something significantly more than the abstract idea. In this case, the PTAB found that the claims only recited basic data operations and the mundane transfer and storage of data. Furthermore, the PTAB found nothing inventive in the nature of the data passed between computers. Hence, the PTAB concluded that the claims were directed to nothing more than a computerized application of a bailment scheme using storage containers.
Practice Note: This case demonstrates that PGR proceedings enable petitioners to challenge patents on § 101 eligibility grounds. Thus, parties will still be able to challenge patents on § 101 grounds after the Transitional Program for Covered Business Method Patents phases out on September 16, 2020, as more post-AIA applications (those filed on or after March 16, 2013) mature into patents that are subject to PGR.
Incomplete Preemption Does Not Result in Patent-Eligible Subject Matter
In a final written decision of a covered business method (CBM) patent review, the Patent Trial and Appeal Board (PTAB or Board) found the challenged claims unpatentable on multiple grounds and clarified that, for the purpose of determining whether claims are ineligible as abstract ideas under Alice, the absence of complete preemption does not necessarily demonstrate patent eligibility. Care N’ Care Insurance Co. and TriZetto Corp. v. Integrated Claims Systems, LLC, Case No. CBM2015-00062 (PTAB, July 28, 2016) (Jung, APJ).
Care N’ Care filed a CBM petition against a patent owned by Integrated Claims. The challenged patent was directed to “an attachment integrated claims (AIC) system for preparing and processing forms with integrated attachments,” which were described as being “digital insurance claims including Prior Approval Claim (PAC) Applications containing both a text form and an integrated digitized attachment.” The CBM petition included grounds of invalidity based on anticipation, obviousness and ineligible subject matter.
The PTAB found that because one of the challenged claims recited a method “wherein the unitary data stream comprises an insurance claim form” the claimed method was “used in” the administration or management of insurance claims and therefore within the penumbra of “financial product or service” under § 18(d)(1) of the AIA. As for the “technological invention” carve-out in § 18(d)(1), the PTAB considered “whether the claimed subject matter as a whole recites a technological feature that is novel and unobvious over the prior art; and solves a technical problem using a technical solution.” In finding the carve-out inapplicable, the PTAB agreed with the petitioner that the claims as a whole did not recite a novel and unobvious technical feature, and that the invention was directed to a business, rather than a technical, problem.
The PTAB next analyzed the subject matter eligibility of the challenged claims under the Supreme Court of the United States’ two-part Alice test. Addressing the first part of the test, the PTAB determined that the subject matter of the challenged claims, when considered as a whole, was directed to the abstract idea of transmitting or copying information from a source to a destination.
The patent owner creatively argued that because the claims did not fully preempt the alleged abstract idea, the claims were directed to patent-eligible subject matter. As support, the patent owner provided examples of methods falling outside the scope of the claims and also pointed to its complaint in the parallel litigation, which did not allege that any system or method would infringe the challenged patent. The PTAB did not agree, noting that the US Court of Appeals for the Federal Circuit explained in Ariosa Diagnostics (IP Update, Vol. 18, No. 12) that “[w]hile preemption may signal patent ineligible subject matter, the absence of complete preemption does not demonstrate patent eligibility.”
Next, citing to the Federal Circuit’s recent Enfish decision (IP Update, Vol. 19, No. 6), the PTAB explained that the first step of the Alice test “cannot simply ask whether the claims involve a patent ineligible concept,” and that “some improvements in computer-related technology when appropriately claimed are undoubtedly not abstract, such as a chip architecture, an LED display, and the like.” The PTAB also noted that according to the Federal Circuit, the “first step in the Alice inquiry . . . asks whether the focus of the claims is on the specific asserted improvement in computer capabilities . . . or, instead, on a process that qualifies as an ‘abstract idea’ for which computers are invoked merely as a tool.” Here, the PTAB determined that the asserted improvement provided by the challenged patent’s invention was not an improvement in computer functionality but rather was simply an improvement to data processing performed by a common computer system.
Moving to the second step of the Alice test, the PTAB found that the claim limitations, considered individually and as an ordered combination, failed to provide the “something more” that would imbue the claims with patent-eligible status. The PTAB also separately analyzed the claims under the machine-or-transformation test, which under Ultramercial (IP Update, Vol. 16, No. 7) provides “a useful clue in the second step of the Alice framework.” Here, the PTAB determined that any computer or network elements recited in the claims were merely conventional or used for post-solution activity, and thus the claims failed to meet the “machine” prong of the test. Similarly, the PTAB found the claims lacking any “transformation” that might meet the other prong. For these reasons, the PTAB found the claims invalid as directed to ineligible subject matter.
As separate grounds of unpatentability, the PTAB found all of the challenged claims anticipated or obvious.
PTAB Rejects Consideration of New Issues on Remand
Addressing the scope of a remand from the US Court of Appeals for the Federal Circuit, the Patent Trial and Appeal Board (PTAB or Board) declined to consider evidence and arguments presented for the first time on remand. Corning Optical Communications RF, LLC v. PPC Broadband, Inc., Case No. IPR2013-00340 (PTAB., Aug. 4, 2016) (Lee, APJ).
Corning Optical filed a petition requesting inter partes review of several claims on a coaxial cable connector. The PTAB issued a final written decision (FWD) finding the claims to be unpatentable over the prior art. The patent owner appealed. On appeal, the Federal Circuit vacated the PTAB’s determination of unpatentability and remanded.
On remand, the PTAB directed the parties to identify which issues the PTAB must reconsider on remand and whether those issues require additional briefing or submission of new evidence. The patent owner argued that the petitioner had failed to identify two entities as real parties-in-interest, requiring dismissal of the petition and termination of the proceeding. Although the patent owner had not raised this issue before the PTAB’s FWD in the present proceeding, the patent owner had timely raised this issue in a related proceeding.
The PTAB generally declined to consider any issues on remand not presented before the FWD. Specifically, the PTAB declined to consider the real party-in-interest issue, finding that “Patent Owner did not raise it before the Federal Circuit while the case was on appeal, and has not sufficiently explained in [its response to the PTAB’s order] why we should consider the new issue now at this late stage.”
The panel explained that because the “2014 FWD was vacated only for specific errors,” it “need only correct those errors . . . Nothing more is required.”
A GUI Situation for CBM
Addressing the issue of subject matter eligibility for covered business method (CBM) patent jurisdiction under § 18(d)(1) of the America Invents Act (AIA), the Patent Trial and Appeal Board (PTAB or Board) instituted CBM review for challenged claims directed to a graphical user interface (GUI). IBG LLC v. Trading Technologies International, Inc., Case No. CBM2016-00031 (Aug. 8, 2016) (Plenzler, APJ).
The patent owner’s claimed invention provides a GUI that dynamically displays the market depth of a traded commodity and allows a trader to place an order efficiently. The petitioner filed a petition requesting CBM review of the challenged claims. A CBM patent is a patent claiming data processing or other operations used in the practice, administration or management of a financial product or service, but excludes patents for technological inventions.
The patent owner did not dispute that the claims were directed to a financial product or service but contended that the claims were not directed to data processing or other operations as required by statute. The PTAB found that the claims encompassed processing financial data of a commodity for display and sending trade orders. The patent owner further contended that the legislative history showed that GUIs were intended to be exempt from CBM review. The PTAB disagreed and found that the AIA did not exempt all user interfaces from CBM review.
The PTAB agreed with the petitioner that the claims did not recite novel and non-obvious technological features because the specification treats as well known all potentially technological aspects of the claims. The PTAB further agreed with petitioner that the challenged patent did not solve a technical problem using a technical solution. Rather, the PTAB found that the challenged patent purported to solve the problem of a user missing an intended price because the price level changed as the user tried to click to send an order. Thus, the PTAB concluded that the challenged patent was subject to CBM review and granted institution.
Practice Note: The PTAB refused to recognize GUIs as an exception to CBM jurisdiction. The PTAB cited the US Patent and Trademark Office’s July 2015 “Update on Subject Matter Eligibility,” noting that at least one example of a claim subject to patent eligibility challenge under § 101 was directed to a GUI invention.
In terms of its § 18(d)(1) jurisdiction, the PTAB declined to credit the patent owner’s legislative history argument that patents claiming GUIs for trading, as opposed to patents claiming a trading strategy, are not subject to CBM review under the AIA. In particular, the legislative history shows that the bill’s sponsor, Senator Chuck Schumer, agreed with Senator Dick Durbin that a patent claiming “software tools and graphical user interfaces that have been widely commercialized and used within the electronic trading industry to implement trading and asset allocation strategies” should not be considered a CBM patent under the AIA.
Trader Woes: Lanham Act Applies Extraterritorially to Canadian Resale of US Grocery Chain’s Products
A recent case from the US Court of Appeals for the Ninth Circuit illustrates how the Lanham Act may be applied extraterritorially to foreign activities that affect US commerce. Trader Joe’s v. Michael Norman Hallatt, Case No. 14-35035 (9th Cir., Aug. 26, 2016) (Christen, J).
The California-based specialty grocery store chain Trader Joe’s (TJ) operates more than a dozen stores in the state of Washington, including near the Canadian border. TJ has no store in Canada, but Canadian customers regularly travel across the border to shop at TJ’s northern-Washington stores. Canadian resident Michael Hallatt bought large quantities of TJ-branded products from one of the TJ stores near the border and resold them at inflated prices at his own store in Canada, which he named “Pirate Joe’s.” Hallatt advertised his store using TJ trademarks, decorated his store to look like TJ stores and used TJ-like signs at his store. TJ demanded that Hallatt stop reselling TJ products, and Hallatt refused. After Hallatt was refused service at TJ stores near the border, he traveled to more distant TJ stores to continue buying TJ products, and he even paid third parties to buy TJ products for him.
TJ sued Hallatt for trademark infringement under the Lanham Act and for Washington state trademark law violations, but the Washington district court granted Hallatt’s motion to dismiss TJ’s federal and state trademark claims for lack of subject-matter jurisdiction, concluding that the Lanham Act did not apply to Hallatt’s conduct in Canada. TJ appealed.
It is well settled that the Lanham Act applies extraterritorially to foreign conduct that affects US commerce. However, the Ninth Circuit faced two specific issues in resolving this appeal: (1) whether the extraterritorial application of the Lanham Act implicates federal courts’ subject-matter jurisdiction, and (2) whether the alleged conduct by Hallatt affected US commerce in a manner sufficient to warrant extraterritorial application of the Lanham Act.
On the first issue, the Ninth Circuit agreed with TJ’s contention that the extraterritorial reach of the Lanham Act is a non-jurisdictional merits question. The Ninth Circuit noted that it is the Lanham Act’s “use in commerce” element and its broad definition of “commerce” that gives the statute extraterritorial reach, and that the “use in commerce” element goes to the merits of a federal trademark claim and is not a jurisdictional element. As such, the Court concluded the extraterritorial application of the Lanham Act does not implicate federal courts’ subject-matter jurisdiction.
As to the second issue, the Ninth Circuit noted that TJ was not alleging that TJ products Hallatt resold from his Canadian store flowed back into the United States in a manner likely to confuse US consumers, but rather that Hallatt’s activities harmed TJ’s reputation and trademark goodwill because Hallatt transported and resold TJ products without proper quality control measures. The Court recognized that Hallatt’s alleged attempt to pass his store off as an authorized TJ reseller could similarly harm TJ’s reputation and diminish the value of TJ’s marks, because Hallatt resold TJ goods at inflated prices and with inferior customer service, all of which may reflect poorly on the TJ brand.
The Court also considered other facts that favored extraterritorial application of the Lanham Act to Hallatt’s conduct, including that (1) Hallatt sourced his inventory entirely from the United States; (2) Hallatt hired others in Washington to purchase TJ products on his behalf; and (3) Hallatt, albeit a Canadian citizen, held permanent resident status in the United States and regularly traveled between Canada and the United States for business. The Ninth Circuit concluded the alleged nexus between Hallatt’s foreign conduct and US commerce to be sufficient to state a Lanham Act claim—namely, that Hallatt’s conduct may cause TJ reputational harm that could decrease the value of TJ’s US trademarks, and that Hallatt operated in US commerce streams when he bought TJ goods in the United States and hired locals to assist him.
The Ninth Circuit affirmed the dismissal of TJ’s state law claims, however, finding that TJ failed to present sufficient facts pertaining to state trademark dilution or harm to a state resident or business.
No Post-Trial “Bait-and-Switch” on Legal Theory
In a trademark infringement dispute, the US Court of Appeals for the Seventh Circuit found that a district court abused its discretion in allowing the plaintiff to argue that the defendant failed to prove continuous of use of its trademark after a date well past the time period in dispute. S.C. Johnson & Son, Inc. v. Nutraceutical Corporation, et. al., Case No. 11-C-861 (7th Cir, Aug. 25, 2016) (Wood, J).
In the early 1990s, Sandy Maine began selling an all-natural bug repellant under the name BUG OFF through her company SunFeather. Despite growing sales of the BUG OFF products, which reached over $1 million per year by 1998, SunFeather did not file any US federal trademark applications for the BUG OFF mark until 2002. The US Patent and Trademark Office (PTO) refused SunFeather’s trademark applications for BUG OFF because, unbeknownst to SunFeather, in 1998 two other competing applications for BUG OFF had been filed by Melvin Chervitz and Kaz, Inc., respectively.
In 2003, S.C. Johnson & Son, Inc., filed its own BUG OFF trademark application for use in connection with its OFF! brand of insect repellant, but the PTO refused the application in view of the 1998 Chervitz and Kaz applications. After fighting over their BUG OFF marks, Chervitz and Kaz eventually settled in 2004. In 2005, after a series of disputes and negotiations, S.C. Johnson acquired the Chervitz and Kaz BUG OFF registrations that were filed in 1998.
During this time, SunFeather was still selling its BUG OFF products, and in February 2011 Nutraceutical Corporation acquired the company’s assets. Shortly thereafter, in September 2011, S.C. Johnson sued Nutraceutical for trademark infringement and unfair competition. Nutraceutical defended on the grounds that it was the prior, senior user of the BUG OFF mark. According to the pretrial report, at all times Nutraceutical relied on its prior and continuous use defense, while S.C. Johnson claimed that Nutraceutical could not establish prior good faith use of the BUG OFF mark before 1998.
When the district court requested post-trial briefing rather than closing arguments, however, S.C. Johnson shifted its position and argued that Nutraceutical had failed to prove continuous use of the mark after 2012. Finding this assertion to be true, the district court ruled in favor of S.C. Johnson and issued a permanent injunction against Nutraceutical’s use of BUG OFF. Nutraceutical appealed.
The Seventh Circuit examined whether the district court abused its discretion by allowing S.C. Johnson to “shift its focus at the eleventh hour to question whether Nutraceutical proved continuous use of BUG OFF products after 2012.” Stating that S.C. Johnson pulled a “bait-and-switch maneuver,” the Court explained that S.C. Johnson’s issues for trial expressly stated that they were limited to the pre-1998 period of use of the BUG OFF trademark, and because issues for trial are generally limited to those issues disputed at summary judgment, “any reasonable litigant would have assumed that it was not required to prove post-2012 continuity at trial.” However, the court also went on to explain that even though post-2012 use of the BUG OFF mark was not at issue in trial, both S.C. Johnson and Nutraceutical had admitted at various points in the trial record that Nutraceutical had been selling the BUG OFF products “online and at retail shops around the country” at the time of the 2011 complaint and through the subsequent trial.
Therefore, the Seventh Circuit determined that under either the theory of waiver or estoppel, S.C. Johnson had raised its argument about post-2012 continuity of use too late, and that the district court abused its discretion in allowing S.C. Johnson to lodge the post-2012 non-use argument: “S.C. Johnson affirmatively misled Nutraceutical about the scope of trial, and then struck only after Nutraceutical could no longer present relevant evidence.” The Court also found that Nutraceutical maintained continuous use of the BUG OFF mark prior to 2012, thus establishing prior common law rights in the mark, and vacated the injunction against Nutraceutical.
Don’t Let Your Color Trade Dress Protection Fade Away
The US Court of Appeals for the 10th Circuit, in affirming a district court ruling, reaffirmed the availability of trade dress protection for colors, but reiterated that a plaintiff must show that its color trade dress is inherently distinctive or has acquired secondary meaning to become distinctive. Forney Industries, Inc. v. Daco of Missouri, Inc., Case No. 15-1226 (10th Cir., Aug. 29, 2016) (Hartz, J).
Forney, a manufacturer of metalworking parts, sold numerous products for decades in packaging that contains a color combination of red, yellow, white and black. Forney sued Daco, dba KDAR, for infringement of its unregistered color trade dress. KDAR’s packages also included a color scheme of red, yellow, white and black in connection with a flame design. After the district court granted summary judgment to KDAR on the grounds that Forney had failed to show either inherent distinctiveness or acquired distinctiveness, Forney appealed.
The 10th Circuit agreed with the district court that Forney’s color mark was not described clearly enough to determine which particular trade dress features were being claimed as comprising the protected mark, and that Forney’s color scheme was not tied to any unique features such as a pattern, design or shape—the only way that a color mark can achieve inherent distinctiveness. The Court emphasized that even though the four colors were used for decades on Foley’s packaging, the layout and color arrangement had been so erratic over the years that the Court could not discern any identifiable pattern that could be ascertained as Foley’s trade dress. The Court queried whether Foley’s description of its mark in the pleadings “would [even] satisfy the articulation requirement for a protectable mark,” and concluded that Foley failed to establish inherent distinctiveness in its mark.
Forney did not provide direct survey evidence of acquired distinctiveness, and its indirect evidence fell short. Foley’s proof of continuous and exclusive use consisted mainly of a “conclusory” declaration by Forney’s CEO that the four colors had been used for 25 years on product packaging, that a large amount of advertising money had been spent and that sales revenues were “over half a billion dollars” during that time frame. However, Forney did not show the most critical element of evidence of acquired distinctiveness, which is a nexus between the color mark itself and the advertising/sales. Without this, there is no proof that consumers, upon seeing the packaging with those four colors, would identify it as originating from a single source. In addition, KDAR provided evidence of third-party packaging that used the same colors, so it was not even clear that Forney was the exclusive user of the claimed trade dress for its allegations to survive summary judgment.
Practice Note: To show inherent distinctiveness of a color mark, proprietors should try to link it to a unique pattern, shape or design. If that is not feasible, secondary meaning can be litigated using survey evidence or other evidence that shows that the color mark is recognized as a source of origin indicator or that the color(s) are touted in advertising by a single source as a source indicator.
Music Played by Karaoke Machine Is Not “Tangible Good” for Purpose of Trademark Infringement **WEB ONLY**
Addressing the “tangible good” requirement of trademark infringement, the US Court of Appeals for the Seventh Circuit upheld the district court’s decision to dismiss a case because defendants’ playing of unauthorized copies of music tracks was not likely to confuse consumers as to the physical source of the medium on which the tracks were played. Phoenix Entertainment Partners v. Dannette Rumsey and Basket Case Pub, Inc., Case No. 15-2844 (7th Cir., July 21, 2016) (Rovner, J).
Phoenix Entertainment Partners, formerly known as Slep-Tone, sells karaoke tracks under the trademark SOUND CHOICE to different establishments, such as restaurants and bars. Slep-Tone’s SOUND CHOICE trademark appeared at the beginning and end of the video displaying the words to the songs being played. Slep-Tone filed suit against Basket Case and its owner Dannette Rumsey (together, the defendants) claiming that they infringed its SOUND CHOICE trademark (and certain trade dress) by playing unauthorized digital copies of Slep-Tone’s karaoke files. According to Slep-Tone, when the defendants play unauthorized copies of Slep-Tone karaoke tracks at the pub, customers see Slep-Tone’s Sound Choice mark and trade dress and believe they are seeing and hearing a legitimate, authentic Slep-Tone track, when in fact they are seeing an unauthorized copy.
Trademark infringement under §§ 32 and 43 of the Lanham Act requires a likelihood of consumer confusion as to the source of any tangible good sold by the defendant. The district court dismissed the case, explaining that the defendants do not sell any tangible good—they only play unauthorized copies of Slep-Tone’s karaoke tracks for their customers. What pub patrons see and hear is the intangible content of the karaoke tracks. Thus, to the extent there is any confusion, it is about the source of that intangible content, not about the physical medium (the tangible good) from which the karaoke tracks are played. Slep-Tone appealed.
The Seventh Circuit agreed with the district court’s dismissal, explaining that “the defendants are not selling compact discs with karaoke tracks and billing them as genuine Slep-Tone tracks, in the way that a street vendor might hawk knock-off Yves Saint Laurent bags or Rolex watches to passers-by. Whatever wrong the defendants may have committed by making (or causing to be made) unauthorized copies of Slep-Tone’s tracks, they are not alleged to have held out a tangible good sold in the marketplace as a Slep-Tone product. Consequently, the defendant’s alleged conduct is not actionable as trademark infringement.”
Practice Note: If Slep-Tone had owned the copyright to the content on the tracks, it would have had a claim for copyright infringement against the defendants.
Copyright Infringement – Plaintiff Not Required to Prove Copies Are Unauthorized **WEB ONLY**
Correcting a transcription error in a prior decision, the US Court of Appeals for the Seventh Circuit confirmed that a plaintiff does not have to prove that infringing copies are unauthorized as part of a prima facie case of copyright infringement. Rather, license, first sale or any other type of authorization defense must be proven by the defendant. Muhammad-Ali v. Final Call, Inc., Case No. 15-2963 (7th Cir., Aug. 10, 2016) (Wood, J).
In 1984, Jesus Muhammad-Ali created a portrait of Louis Farrakhan, the leader of the Nation of Islam, at Farrakhan’s request. Ali registered and recorded a copyright in the painting in 1986. The Final Call, the “propagation arm of the Nation of Islam,” began selling lithographic copies of Ali’s portrait of Farrakhan at some point after the original painting was created. Ali later sued for copyright infringement, seeking damages for 115 lithographs that The Final Call admitted it had sold in the previous three years.
Prior to trial, The Final Call relinquished all of its defenses and explained that its only argument was that the 115 copies were authorized by Ali. According to The Final Call, its authorization “argument [was] a negative defense, not an affirmative one,” and instead was “an attack on the plaintiff’s ability to establish its own burden.” During the ensuing bench trial, the primary witness for The Final Call testified that he had no knowledge of who made the lithographs or how The Final Call acquired them, and that no lithographs had been made since 1993 when he began working at The Final Call. He further admitted that The Final Call had no formal relationship with Farrakhan.
In its ruling, the district court admitted that it was unsure which party had the burden of proving whether the prints were authorized. However, it ruled in The Final Call’s favor because the facts demonstrated that Ali authorized the making of lithographs in his original agreement with Louis Farrakhan—and alluded to the implied license and first sale defenses. Ali appealed.
The Seventh Circuit found that the district court misapplied the legal standard for copyright infringement, and confirmed that Ali was not required to prove that the copying was unauthorized. It noted that the reason for the district court’s error was a transcription error in a 2013 Seventh Circuit case, Hobbs v. John. In Hobbs, the Seventh Circuit misquoted the copyright infringement standard as requiring “unauthorized copying of constituent elements of the work that are original” even though the word “unauthorized” was not part of the standard in the prior case law cited by Hobbs. The current Seventh Circuit corrected Hobbs’ mistake and emphasized that Ali had met his prima facie case.
The Seventh Circuit then noted that The Final Call could not prove authorization as an affirmative defense because it had waived all affirmative defenses, and even if the district court’s resuscitation of the implied license and first sale defenses was appropriate, The Final Call could not establish either defense. As to the implied license defense, the Court ruled that The Final Call could not prove that it had requested the creation of the original work and that the original work had been delivered to The Final Call, because it was Farrakhan who had requested the work and later accepted delivery. While the district court found a “practical identity of interests” between Farrakhan and The Final Call, the Seventh Circuit rejected this idea and found no evidence to connect the lithographs sold by The Final Call to Farrakhan. The Seventh Circuit also rejected the first sale defense because The Final Call could not prove that the specific lithographs sold were from an authorized batch. Accordingly, the Seventh Circuit reversed the district court and found that Ali had successfully proven copyright infringement.
Ninth Circuit Provides a Second Look at Willful Copyright Infringement **WEB ONLY**
In a case stemming from a copyright dispute over photographs of the legendary hip hop group Run-DMC, the US Court of Appeals for the Ninth Circuit reversed a district court’s grant of summary judgment in favor of a music merchandising company on claims that the merchandising company willfully infringed the photographer’s copyrights and knowingly removed copyright management information (CMI) from the images it used. The Court also affirmed the district court’s ruling on the limitation of plaintiff’s statutory damages. Glen E. Friedman v. Live Nation Merchandise Inc., Case No. 14-55302 (9th Cir., Aug. 19, 2016) (Berzon, J).
Glen Friedman is a well-known music and subculture photographer who took a series of photographs of Run-DMC in the 1980s. After he discovered that several of his Run-DMC images were being used without his permission by Live Nation Merchandising in a 2008 wall calendar and for three different t-shirt designs, Friedman filed a complaint for copyright infringement and removal of CMI.
Friedman moved for summary judgment on the copyright infringement issue, and Live Nation stipulated to liability for infringement. Live Nation then moved for partial summary judgment on Friedman’s CMI and willful infringement claims. The district court granted Live Nation’s motion for partial summary judgment, finding that Friedman offered no evidence regarding the removal of CMI or with regard to Live Nation’s willful infringement. The district court also rejected Friedman’s calculation of damages based on the number of third-party retailers to which Live Nation had distributed the calendars and t-shirts, and concluded that Friedman was entitled to only one statutory damages award per infringed work. Friedman appealed.
On appeal, the court examined (1) whether there was sufficient evidence in the record to permit a jury to conclude that Live Nation committed willful copyright infringement, making it liable for additional damages under the Copyright Act; (2) whether a jury could conclude that Live Nation knowingly removed CMI from the photographs in question; and (3) whether Friedman could recover statutory damages awards measured by the number of retailers that purchased infringing merchandise from Live Nation, even though Friedman did not join those retailers as defendants in his suit.
Willful Copyright Infringement
Under the Copyright Act, the copyright owner has the burden of proving willful infringement. The amount of damages that a plaintiff may recover for infringement depends on whether the infringement was committed willfully, i.e., through intentional or reckless behavior, or through willful blindness to the copyright holder’s rights.
The Ninth Circuit concluded that record evidence gave rise to a triable issue of fact as to whether Live Nation’s infringement was willful. In particular, the Court pointed to evidence in the record discussing Live Nation’s product approval forms, which did not provide that the artists granting approval of the merchandise products were obligated to report whether the artists owned the rights to images proposed by Live Nation. The Court found that approval procedures that never explicitly inquire as to copyright could amount to recklessness or willful blindness. The Court also cited an internal Live Nation email stressing that the company should not use Glenn Freidman photos because he owns all of the rights to his photos, which could suggest that Live Nation was aware of the risk of infringement. Thus, the Court concluded that the district court erred in granting summary judgment to Live Nation on the issue of willfulness.
Removal of CMI
The Ninth Circuit also found that the district court erred in granting summary judgment on Friedman’s claim under § 1202(b) of the Digital Millennium Copyright Act regarding removal of CMI, and explained that Friedman could still prevail upon a showing that Live Nation distributed his works with knowledge that CMI has been removed, even if Live Nation did not remove it directly. Again looking to the evidence of record, the Court noted that Friedman’s filings had shown comparison images that demonstrated that Friedman’s images on Live Nation’s products did not include copyright information that had been present on earlier versions of the photos. The Court concluded that record evidence created a triable issue of fact as to whether Live Nation distributed Friedman’s photographs with the requisite knowledge that CMI had been removed.
Statutory Damages Under the Copyright Act
Finally, citing its own decision in Columbia Pictures v. Krypton Broadcasting, the Ninth Circuit affirmed the district court’s ruling on statutory damages, holding that the Copyright Act § 504(c)(1) provision of separate statutory damage awards for the infringement of each work “for which any two or more infringers are liable jointly and severally” applied only to parties that have been included in the proceeding as defendants. Therefore, a plaintiff seeking separate damage awards on the basis of downstream infringement must join the downstream infringers in the action and prove their liability for infringement. Because Friedman did not join any of his purported downstream infringers as defendants in the action, the Court affirmed the district court’s holding that was limited to one statutory damages award per work infringed by Live Nation.
Infringement of Microscope Photos Yields Magnified Damages
Addressing several issues concerning damages in a copyright infringement case, the US Court of Appeals for the Third Circuit affirmed a jury’s award of $1.6 million to a stem-cell photographer, but vacated and remanded the court’s denial of prejudgment interest. Leonard v. Stemtech International, Inc., Case Nos. 15-3198; 3247 (3d Cir., Aug. 24, 2016) (Shwartz, J).
Andrew Leonard is one of a few photographers who create images of stem cells using electron microscopes. Leonard licenses his specialized images on a limited basis in order to maintain the value of his work and has received licensing fees ranging from $1,500 to $6,500 depending on the purpose and nature of the licensed image. In 2006, Stemtech, a nutritional supplement company, contacted Leonard about licensing one of his images. Stemtech agreed to pay Leonard $950 for a license to use the image solely in its internal magazine. However, Stemtech then proceeded to use the image on its website, marketing DVDs and other promotional materials, and provided the image to its distributors for their use. Leonard learned of this infringing use and asked Stemtech to stop using his image, but Stemtech and its distributors continued to use the image.
Leonard sued Stemtech for copyright infringement, and at trial, Leonard relied on a damages expert who opined that Leonard’s damages from Stemtech’s infringement ranged from $1.4 million to nearly $3 million. A jury found Stemtech liable for direct, vicarious and contributory copyright infringement and awarded $1.6 million in damages. The court, however, declined to award prejudgment interest, reasoning that the damages award had “sufficiently compensated” Leonard. Stemtech appealed the damages award, and Leonard cross-appealed denial of prejudgment interest.
Stemtech argued that the court’s affirmance of the jury’s damages award was an abuse of discretion. Stemtech contended that Leonard’s damages expert used a flawed methodology, rested on unreliable bases, and should have thus been excluded. The Third Circuit disagreed, finding that Leonard had properly employed a fair market value methodology in calculating Leonard’s damages range: the expert collected quotes for licensing fees from various photo agencies for uses similar to Stemtech’s use, averaged them, multiplied that average by the number of alleged instances of infringement, and then multiplied that figure by “premiums,” taking into account the rarity of the photographs and the exclusivity of Leonard’s licensing during the infringement period. Any issues that Stemtech raised with the expert opinion went to weight, the Court explained, not admissibility.
The Third Circuit also rejected Stemtech’s argument that the $1.6 million verdict was excessive. Although recognizing that the award was “quite high,” the Court felt that it did not shock the conscience and that the verdict was tied to the record evidence of the scope and circumstances of Stemtech’s infringement. The damages award—specifically, the use of multipliers—was not punitive; rather, the multipliers were used to account for the fair market value of Leonard’s unique images.
In his cross-appeal, Leonard challenged the district court’s denial of an award of Stemtech’s profits and prejudgment interest. The Third Circuit found that Leonard was not entitled to Stemtech’s profits because Leonard had failed to demonstrate what, if any, of Stemtech’s profits were attributable to its unauthorized use of Leonard’s image. The Court disagreed, however, that Leonard was not entitled to prejudgment interest. Prejudgment interest serves to compensate plaintiffs for a different harm than damages alone—it serves to recoup the time-value of a plaintiff’s loss. The district court thus erred in denying prejudgment interest on the grounds that the $1.6 million adequately compensated Leonard. Although recognizing that calculating prejudgment interest based on 92 separate incidents of infringement would be difficult, that difficulty was not a basis for denying Leonard prejudgment interest.
Practice Note: In many cases, prejudgment interest is an afterthought. Prejudgment interest in protracted litigation (the complaint in this case was filed in 2008), however, can be significant. As with any request for damages, plaintiffs must gather evidence to support an award of prejudgment interest and should work to facilitate the court’s interest calculation.
Iron Man Composer Battles Tech Giant Sony and Ghostface Killah
The US Court of Appeals for the Second Circuit ruled in favor of the composer of the 1960s Iron Man theme song, finding material facts in dispute as to whether the song was commissioned as a work for hire. Jack Urbont v. Sony Music Entertainment, Case No. 15-1778-cv (2d Cir., July 29, 2016) (Hall, J).
In 1966, Jack Urbont wrote the theme songs for various characters in the “Marvel Super Heroes” television show, including Iron Man. In 2000, hip hop artist Dennis Coles (known as Ghostface Killah), Sony and Razor Sharp Records produced and released the album “Supreme Clientele” featuring the Iron Man theme song on two tracks, prompting Urbont’s June 2011 copyright infringement lawsuit against Sony, Razor Sharp Records and Ghostface Killah. At trial, the district court found that the defendants had standing to challenge Urbont’s ownership of the copyright under the “work for hire” doctrine, and granted the defendants’ motion for summary judgment on standing, finding that the Iron Man song was a “work for hire” composed at Marvel’s instance and expense, and that Urbont had not presented evidence of an ownership agreement with Marvel sufficient to overcome the presumption that the work was for hire. Urbont appealed.
Third-Party Standing to Assert Right to Hire Defense
On appeal, Urbont cited the US Court of Appeals for the Ninth Circuit’s 2010 holding in Jules Jordan Video v. 144942 Canada, which rejected third-party standing under the work for hire doctrine. The Second Circuit rejected Urbont’s argument, explaining that in that case both potential owners of the copyright were parties to the lawsuit, neither of which disputed ownership. Here, Marvel was not a party to the suit, and a plaintiff in a copyright infringement suit bears the burden of proving ownership of the copyright when ownership is challenged either by an employer or a third party. Citing Island Software & Computer Serv. v. Microsoft, the Court explained that Sony, a third party to an alleged employer-employee relationship, did have standing to raise the “work for hire” defense to try to refute Urbont’s alleged ownership of the copyright.
The Copyright Act Claim
Under the Copyright Act, an employer is considered an “author” of a copyrightable work in the case of works made for hire. Citing to its 2013 case Marvel Characters v. Kirby, the Second Circuit explained that absent an agreement to the contrary, a work is made for hire when it is “made at the hiring party’s ‘instance and expense,’” i.e., when the employer induces the creation of the work and has the right to direct and supervise the manner in which the work is carried out.
In reversing, the Second Circuit credited the district court’s reliance on evidence supporting the assertion that the song was a work for hire developed at Marvel’s instance, including that Urbont had not previously been familiar with the Marvel superheroes and had created the work from material given to him by Stan Lee, who had the right to accept or reject his song. However, the Court concluded that Urbont’s evidence that he retained all creative control over the project and that Lee was not permitted to modify the work, coupled with his testimony that he approached Lee, not the other way around, weighed against finding that the work was created at Marvel’s instance.
As for the expense factor, Urbont claimed that he created the song with his own tools and resources, including renting a recording studio, supported his assertion that it was he, not Marvel, who bore the risk of the work’s success. Although the $3,000 payment Urbont received weighed in favor of a finding that the work was created at Marvel’s expense, Urbont’s testimony that he also received royalties undermined such a conclusion. The Second Circuit explained that while a hiring party’s payment of a specific sum in exchange for an independent contractor’s work satisfies the “expense” requirement, the payment of royalties weighs against finding a “work for hire” relationship. The Court thus found that a genuine issue of material fact remained as to whether the Iron Man composition was a work for hire created at Marvel’s instance and expense.
Finally, the Second Circuit found that the district court erred in concluding that Urbont failed to produce evidence to rebut the presumption that Marvel owned the work, noting that on summary judgment, the district court was required to accept Urbont’s testimony in support of his position. The Court reversed and remanded the case back to the district court.