The Parade of Horribles Fallacy: § 285 Attorneys’ Fees Implicit Notice Requirement
The US Court of Appeals for the Federal Circuit affirmed a district court’s denial of attorneys’ fees, finding that the district court did not abuse its discretion in concluding that a medical device company’s failure to notify the opposing party of its invalidity position until filing its fees motion weighed against awarding attorneys’ fees under 35 USC § 285. Stone Basket Innovations, LLC v. Cook Medical, LLC, Case No. 16-2696 (Fed. Cir., June 11, 2018) (Wallach, J).
In May 2015, Stone Basket sued Cook Medical for patent infringement. By October 2015, Cook Medical had served its invalidity contentions, and by January 2016 it had deposed the patent’s inventor, who conceded that there was “nothing novel about” a key limitation in the patent. In March 2016, Cook Medical petitioned for inter partes review (IPR) of all claims of the asserted patent. Following institution, Stone Basket requested an adverse judgment in the IPR proceeding, and all claims of the patent were canceled. Stone Basket then successfully moved to dismiss the district court case with prejudice.
Following the dismissal, Cook Medical filed a motion under § 285 of the Patent Act for attorneys’ fees, arguing that Stone Basket’s litigation position was exceptional in view of its alleged substantive weakness and Stone Basket’s pattern of vexatious litigation. Up until this point, Cook Medical had not notified Stone Basket of the exceptionality or frivolousness of its case. The district court denied the motion, finding that none of the evidence put forth by Cook Medical warranted such fees. Cook Medical appealed.
On appeal, Cook Medical argued that the invalidity contentions it filed with the district court should have put Stone Basket on notice that its patent was invalid as obvious. The Federal Circuit disagreed, finding that the contentions “fall short of notifying Stone [Basket]” of the invalidity of the patent. The Court found that Cook Medical’s invalidity contentions failed to put Stone Basket on “clear notice” of the asserted patent’s invalidity because they merely listed 32 references, along with a blanket statement of obviousness and “inconsistent and unilluminating” claim charts. The Court also found that the inventor’s testimony that a single claim limitation was known in the prior art did not make the case exceptional because patentability is considered by evaluating the claim as a whole.
The Federal Circuit also found that the district court did not err by factoring in Cook Medical’s litigation conduct, emphasizing that Cook Medical’s failure to provide early notice of its assertion of frivolousness weighed against finding the case exceptional. The Court cited a March 2018 ruling on attorneys’ fees by the US District Court for the Central District of California in Aten Int’l Co. v. Uniclass Tech., which held that a “party cannot simply hide under a rock, quietly documenting all the ways it’s been wronged, so that it can march out its parade of horribles after all is said and done.” While the Federal Circuit did not cite any precedent for this notice requirement, the Court found “this reasoning both persuasive and applicable to this case.”
Practice Note: While § 285 does not expressly require notice, this case suggests that such notice to both the opposing party and the court will be an important aspect in determining whether a case is exceptional.
Information Distributed Without Disclosure Restrictions May Qualify as Prior Art Printed Publications
Addressing whether the distribution of certain materials at one or more meetings renders such materials printed publications under 35 USC § 102(b), the US Court of Appeals for the Federal Circuit vacated a Patent Trial and Appeal Board (PTAB) decision that certain video and slides distributed to specific groups of people at meetings were not admissible as prior art because they were not “sufficiently accessible to the public.” Medtronic, Inc. v. Mark A. Barry, Case No. 2017-1169 (Fed. Cir., June 11, 2018) (Chen, J).
Medtronic manufactures surgical systems and tools used in spinal surgeries. Dr. Mark Barry owns patents directed to methods for ameliorating aberrant spinal column deviation conditions. Dr. Barry sued Medtronic for patent infringement, alleging that Medtronic’s products infringed several of his patents relating to spinal tools and systems. In response, Medtronic petitioned for inter partes review (IPR) proceedings, claiming that Dr. Barry’s patents were obvious in view of the following:
- A prior art US patent
- A chapter in a book entitled Masters Techniques in Orthopaedic Surgery: The Spine (2d ed.)
- A video entitled “Thoracic Pedicle Screws for Idiopathic Scoliosis” and slides entitled “Free Hand Thoracic Screw Placement and Clinical Use in Scoliosis and Kyphosis Surgery” that had been distributed at a meeting of the Spinal Deformity Study Group (SDSG) in Arizona
The PTAB instituted IPR proceedings and found that the challenged claims would not have been obvious over the prior art US patent and book chapter, and that the video and slides did not qualify as prior art publications against Dr. Barry’s patents because they were not “sufficiently accessible to the public.” Medtronic appealed.
On appeal, the parties mainly disputed whether the video and slides constituted prior art printed publications within the meaning of 35 USC § 102(b). Medtronic argued that the PTAB erred in assuming that that since the video and slides were distributed only to members of the SDSG, they were not “sufficiently accessible.” Dr. Barry countered that since the video and slides were only available to a limited group of experts, they were not “publicly accessible.”
The Federal Circuit vacated the PTAB’s decision, finding that whether a distribution renders the materials printed publications under 35 USC § 102(b) depends upon “the size and nature of the meetings and whether they are open to people interested in the subject matter of the material disclosed,” and “whether there is an expectation of confidentiality between the distributor and the recipients of the materials.” In vacating the PTAB’s finding that the videos and slides were not “sufficiently accessible to the public,” the Federal Circuit noted that the PTAB failed to fully consider all of the relevant factors, particularly with respect to the potentially critical difference between events where the materials were distributed, including the SDSG meeting in Arizona and programs in Colorado Springs and St. Louis, which were not limited to members of the SDSG. In particular, the PTAB failed to address whether the disclosures of materials at the programs in Colorado Springs and St. Louis would remain confidential.
Remanding the case for further proceedings, the Federal Circuit held that
Distributing materials to a group of experts, does not, without further basis, render those materials publicly accessible or inaccessible, simply by virtue of the relative expertise of the recipients. The nature of those meetings, as well as any restrictions on public disclosures, expectations of confidentiality, or, alternatively, expectations of sharing the information gained, can bear important weight in the overall inquiry.
Practice Note: When distributing information relating to a concept for which one hopes to eventually seek patent protection, the utmost care must be exercised to restrict who receives the information, and expectations of confidentiality must be made clear from the outset.
No Sua Sponte Remand for Erroneously Limited Post-SAS Final Written Decisions
The US Court of Appeals for the Federal Circuit concluded that, post-SAS, it possessed jurisdiction to hear an appeal from an inter partes review (IPR) even where the Patent Trial and Appeal Board (PTAB) erred in limiting its institution decision to less than all the challenged claims and grounds. PGS Geophysical AS v. Iancu, Case Nos. 16-2470; -2472; -2474 (Fed. Cir., June 7, 2018) (Taranto, J).
PGS Geophysical is the patent owner of methods and systems directed toward marine seismic surveying. A competitor filed three separate IPRs against PGS’s patent. The PTAB instituted all three petitions, but only for some of the claims and not on all asserted grounds. PGS initially appealed the findings of the PTAB’s final written decisions (FWDs) as to obviousness, but during the pendency of the appeal, the parties settled. Director Iancu intervened to defend the PTAB’s decisions, however.
The Federal Circuit explained that under SAS Institute, Inc. v. Iancu (IP Update, Vol. 21, No. 5), in which the Supreme Court of the United States held that the IPR statute does not permit partial institution on an IPR petition, the PTAB erred in limiting the scope of the IPRs it instituted and in the scope of its FWDs. The Court concluded, however, that it still had jurisdiction to address the merits of the PTAB’s decisions and did not need to remand to the PTAB to address the claims and grounds the PTAB improperly excluded.
Specifically, the Court found that the standard for “final agency action” under the Administrative Procedure Act, 5 USC § 704, was met because the PTAB’s FWDs constituted a completion of the decision making process sufficient to determine all legal rights and obligations at issue. The Court explained that the PTAB issued institution decisions and FWDs in each IPR, and that even though the decisions were erroneous under SAS, they terminated the IPR proceedings as to all claims and grounds. Drawing an analogy to civil litigation, the Federal Circuit compared this situation to one where a district court erroneously and prematurely dismisses one count of a complaint while proceeding to a merits determination on a second count. Once the second count is resolved, both counts are subject to appeal. The Court noted that “legal error does not mean lack of finality.”
The Federal Circuit also pointed out that it was under no obligation to sua sponte correct the PTAB’s error regarding its failure to institute on all claims under a harmless error analysis requiring the challenger to bear the burden of showing prejudice. Noting that neither party expressly sought relief under SAS, the Court declined to exercise its discretion to revive the non-instituted claims in the interest of finality and expedition. Indeed, the Court declined to comment on whether the outcome would be altered if either party had specifically sought SAS-based relief.
On the merits of the FWDs, wherein the PTAB found certain claims to be obvious, the Federal Circuit affirmed, noting precedent regarding affirmance of an agency action “of less than ideal clarity if the agency’s path may reasonably be discerned.”
Practice Note: When applicable, patent owners should consider specifically appealing for SAS-based relief.
Federal Circuit Orders PTAB to Clear Up Clouded Examination
The US Court of Appeals for the Federal Circuit vacated a Patent Trial and Appeal Board (PTAB) rejection of claims as obvious and remanded the case, finding that the PTAB failed to review arguments in a reply brief. In re: Durance, Case No. 17-1486 (Fed. Cir., June 1, 2018) (Reyna, J).
Durance filed a patent application directed to microwave vacuum-drying of organic materials, such as fruits. During examination of the application, the examiner rejected all of Durance’s claims, including the independent apparatus and method claims, based on a combination of cited references. In the final office action, the examiner relied on Figures 6 and 7 of a cited reference and inherency as teaching the claimed invention. In a subsequent interview, the examiner changed course and relied on Figure 8 of the cited reference as teaching the claimed invention. Later, in an answer to Durance’s appeal, the examiner again changed course and relied on all of the identified figures in the cited reference, as well as a new argument that the combined references taught an identical structure to the claimed invention. The identical-structure argument was not identified as a new ground of rejection in the answer.
In the reply brief, Durance challenged the identical-structure argument and explained that the examiner’s understanding of the claimed invention’s structure was inaccurate because the claimed invention relied on gears, not gravity as in the combined references, and that the identical-structure argument therefore did not apply. However, the PTAB affirmed the examiner, finding the claims obvious in view of the cited references and inherency, and disregarded Durance’s arguments in the reply brief as not responsive to argument raised in the answer.
Durance requested rehearing, alleging that the reply brief arguments were ignored, that inherency was improperly applied, and that the identical-structure argument cannot be used to show that a method claim is inherently performed by a combination of references. The PTAB denied the request, asserting that it did not rely on inherency and that the reply brief arguments were properly ignored as not being directed to a new ground of rejection in the answer. Durance appealed.
On appeal the Federal Circuit explained that the US Patent and Trademark Office continually shifted its position on which structures and characteristics of the cited references established the basis for rejection. The Court found that the examiner and PTAB also continually changed which embodiment of the cited reference was relied upon throughout prosecution, and changed position on whether inherency was being applied. The Federal Circuit found that the examiner and the PTAB clouded the issues, and that the examiner’s identical-structure argument was raised for the first time in the answer. Because the PTAB did not review the reply-brief arguments, the Court vacated the PTAB’s decision and remanded for consideration of Durance’s arguments.
PTAB Need Not Consider Prior Art of Record Not Relied on in IPR Petition
The US Court of Appeals for the Federal Circuit upheld an inter partes review (IPR) determination that challenged claims were not obvious over two references asserted in requestor’s IPR petition without consideration of other prior art made of record in the proceedings. Sirona Dental Systems GmbH v. Institut Straumann AG, et al., Case Nos. 17-1341; -1403 (Fed Cir., June 19, 2018) (Moore, J).
Sirona owned a patent directed to a method for producing a drill template to precisely place a dental implant using image markers. Institut Straumann challenged the patent in an IPR petition that set forth three grounds of invalidity. In this pre-SAS case, the Patent Trial and Appeal Board (PTAB) instituted on two of the three grounds. Sirona filed a contingent motion to amend that petitioner opposed, arguing the proposed substitute claims would have been obvious over additional prior art not relied on in the instituted grounds. In its final written decision (FWD), the PTAB concluded that several challenged claims would have been obvious in view of the prior art asserted in the original petition, while petitioner failed to meet its burden with respect to other asserted grounds. The PTAB also denied Sirona’s motion to amend, concluding that it failed to show that the proposed substitute claims were patentable over a combination of prior art, including the art cited in petitioner’s opposition. Both parties appealed.
As to the groups of claims that the PTAB concluded were obvious, the Federal Circuit affirmed based on the substantial evidence test.
As to the group of claims that the PTAB found had not been proven to be unpatentable, petitioner argued that the PTAB “should have applied findings from its analysis of Sirona’s contingent motion to amend,” where the PTAB found that the prior art presented in the opposition contained the teaching that the PTAB found lacking in the asserted prior art from the original petition. The Federal Circuit rejected the contention as an attempt to add references to the originally asserted grounds on asserted invalidity: “We see no error in the Board’s decision not to decide grounds of unpatentability not raised in the petition.”
Finally, the Federal Circuit reversed the PTAB’s denial of Sirona’s contingent motion to amend, finding that the PTAB “improperly placed the burden on Sirona to demonstrate that the proposed substitute claims were patentable.” On that issue, the FWD was vacated and remanded for the PTAB to reconsider in light of the intervening en banc Federal Circuit decision in Aqua Products (IP Update, Vol. 19, No. 8).
Sirona had also argued that the FWD improperly rejected the proposed substitute claims based on a combination of references not raised by petitioners, and that “even if the Board could rely on a combination of references not raised by Petitioners, [it] did not receive notice and an opportunity to respond to the combination of references the Board relied on, as required under the [Administrative Procedure Act].” The Federal Circuit declined to address this issue, instead instructing the PTAB to “determine in the first instance, in light of recent precedent including SAS Institute, Inc. v. Iancu, [IP Update, Vol. 21, No. 5] whether it may consider combinations of references not argued by the petitioner in opposing the motion to amend claims, and, if so, what procedures consistent with the APA are required to do so.”
Mind Your Own Place of Business
Addressing whether the place of business of a defendant’s distributor should be considered a place of business of the defendant, Circuit Judge Bryson, sitting by designation in the US District Court for the Eastern District of Texas, explained that even where a distributor is “necessary” to a defendant’s business, without more, its place of business is not imputed to defendant for purposes of patent venue. EMED Techs. Corp. v. Repro-Med Sys., Inc., Case No. 2:17-cv-728-WCB-RSP (E.D. Tex., June 4, 2018) (Bryson, J).
EMED Technologies Corp. filed a patent infringement action against Repro-Med Systems, Inc. (RMS), a New York corporation with its principal place of business in Chester, New York. RMS moved to dismiss under 12(b)(3) for improper venue because it is incorporated in New York and has no offices in the Eastern District of Texas. RMS does, however, sell products through various distributors it lists on its website. Two of its listed distributors have established places of business in the Eastern District of Texas, and RMS’s website directs potential customers in the Eastern District to these two distributors. RMS and its distributors have an otherwise arms-length supplier-distributor relationship.
EMED argued that venue was proper, and the district court granted limited discovery on whether RMS had a regular and established place of business in the Eastern District of Texas. At deposition, RMS’s chief financial officer admitted that RMS’s customers “require RMS to conduct its business through a distributor” because it is more convenient for the customers. EMED then argued that because the distributors were “necessary to conduct the business of the defendant,” the distributors’ place of business should be imputed to RMS.
The district court disagreed, finding that without more, an arms-length business relationship does not cause a distributor’s place of business to be attributed to its supplier. There was no allegation that the distributors and RMS acted as a single corporate entity, and the court cautioned that a “necessary distributor” theory essentially reverted patent venue under § 1400(b) into a test for personal jurisdiction, which the US Court of Appeals for the Federal Circuit explicitly rejected in In re: Cray (IP Update, Vol. 20, No. 9), following the Supreme Court of the United States’ decision in TC Heartland (IP Update, Vol. 20, No. 5).
Finding that the distributors’ place of business was not a place of business of the defendant, the district court found venue in the Eastern District of Texas improper and transferred the action to the Southern District of New York, where RMS’s principal place of business was located.
Don’t Have “Means?” Things Might Get GUI
The US Court of Appeals for the Federal Circuit reiterated that the relevant inquiry and factual findings required to support a conclusion that claims recite mean-plus-function terms is evidentiary support by the challenger that a contested claim term fails to recite structure. Zeroclick, LLC v. Apple, Inc., Case No. 891 F.3d 1003 (Fed. Cir., June 1, 2018) (Hughes, J).
Zeroclick sued Apple for allegedly infringing patent claims related to graphical user interfaces (GUIs) and modifications that allow the GUIs to be controlled using predefined pointer or touch movements. Apple counterclaimed that the asserted claims were invalid. The district court agreed, finding the claims invalid for indefiniteness, as reciting means-plus-function limitations for which the specification(s) did not disclose sufficient structure.
Zeroclick appealed, arguing that the district court erred in construing claim terms as means-plus-function limitations. After de novo review of the claim construction, whether the claim language invoked § 112(6), post-AIA § 112(f) and any indefiniteness, the Federal Circuit reversed the district court’s judgment and remanded for further proceedings.
Federal Circuit precedent recognizes “the importance of the presence or absence of the word ‘means’” to determine whether § 112, ¶ 6 applies to a claim limitation. Williamson (IP Update, Vol. 18, No. 6). While failure to use “means” creates a rebuttable presumption that § 112, ¶ 6 does not apply, the presumption can be overcome and § 112, ¶ 6 will apply “if the challenger demonstrates that the claim term fails to recite sufficiently definite structure or else recites function without reciting sufficient structure for performing that function.” Under a preponderance of the evidence standard, “the essential inquiry remains ‘whether the words of the claim are understood by persons of ordinary skill in the art to have a sufficiently definite meaning as the name for structure,’” i.e., “a reasonably well understood meaning in the art.” Following traditional claim construction principles, the § 112, ¶ 6 determination must be made on an element-by-element basis in light of evidence intrinsic and extrinsic to the asserted patent, including an analysis of the patent and its prosecution history.
Here, the district court failed to undertake such an inquiry and make related factual findings. Although none of the limitations at issue used the word “means,” Apple provided no evidentiary support for its position that the limitations should nonetheless be construed under § 112, ¶ 6, and thus the presumption against applying § 112, ¶ 6 remained unrebutted. The Federal Circuit considered the district court’s discussion, finding it “couched in conclusory language” that contrasted and relied on Apple’s arguments against Zeroclick’s contentions, but “pointed to no record evidence” supporting Apple’s contention that § 112, ¶ 6 applied.
The Federal Circuit thus found the district court’s treatment of the claim terms “program” and “user interface code” as nonce words (substituting for “means” to presumptively bring the disputed limitations under § 112, ¶ 6) erroneous for at least three related reasons:
- “[T]he mere fact that the disputed limitations incorporate functional languages does not automatically convert the words into means for performing such functions.”
- The analysis “removed the terms from their context, which otherwise strongly suggests the plain and ordinary meaning of the terms,” despite a person of ordinary skill in the art being able to “reasonably discern from the claim language” that “program” and “user interface code” were used “not as generic terms or black box recitations of structure or abstractions, but rather as specific references to conventional [GUIs] or code, existing in prior art at the time of the inventions.”
- “[T]he district court made no pertinent finding [compelling] the conclusion that a conventional [GUI] program or code is used in common parlance as substitute for ‘means.’”
Dissent on Scope of Federal Circuit Jurisdiction
In February 2018, a three-judge panel from the US Court of Appeals for the Federal Circuit found a lack of appellate jurisdiction and transferred a Walker Process claim to the Fifth Circuit (IP Update, Vol. 21, No. 2). Now, the full Federal Circuit has denied an en banc rehearing in that case. Xitronix Corp. v. KLA-Tencor Corp., Case No. 16-2746 (Fed. Cir., June 15, 2018) (en banc) (Newman, J, dissenting) (Lourie, J, dissenting w/o opinion). While a decision not to rehear a case may seem relatively unremarkable, a notable dissent from Judge Newman has drawn attention.
In its Walker Process claim, Xitronix alleged that KLA-Tencor obtained a patent through knowing and willful fraud on the US Patent and Trademark Office and was therefore liable for an antitrust violation. In transferring jurisdiction to the Fifth Circuit, the Federal Circuit panel found that the “underlying patent issue in this case, while important to the parties and necessary for resolution of the claims, does not present a substantial issue of patent law.” Therefore, the panel reasoned, the case belonged in the Fifth Circuit.
The en banc Federal Circuit has now confirmed this holding without comment. In dissent, however, Judge Newman referred to the ruling as “unprecedented,” “unsupported,” “contrary to the statute governing the Federal Circuit, and contrary to decades of precedent and experience.”
In Newman’s view, the panel held that appeals involving non-patent issues were no longer within the Federal Circuit’s jurisdiction. This amounted to a dramatic jurisdictional change, she asserted. “If the court now wishes to remove itself from jurisdiction of cases that may involve issues in addition to patent issues, we should make this change en banc.”
It was especially perplexing, in Newman’s opinion, that neither party questioned the Federal Circuit’s appellate jurisdiction. The panel raised the appellate jurisdiction issue sua sponte. While the panel found that “[s]omething more is required to raise a substantial issue of patent law,” it never indicated “what that ‘[s]omething more’ might be,” she noted. As a result of this panel decision, the Federal Circuit would no longer have “jurisdiction over appeals of Walker Process claims, and . . . all appeals where the complaint includes non-patent issues,” she wrote.
Practice Note: Although Judge Newman’s dissent takes issue with what she views as a “vast jurisdictional change,” her view of the issue could be read as more expansive than the panel decision. The panel concluded that appeals of Walker Process claims would not automatically be heard in the Federal Circuit, while Newman suggests that the panel’s decision now requires all appeals of Walker Process claims to be heard in regional circuits. Either way, parties appealing Walker Process claims to the Federal Circuit should consider making specific jurisdictional presentations and should anticipate that their appeal might be transferred to a regional circuit court.
FastShip or Slow Boat? Patents Expired Before Ship “Manufactured”
Addressing for the first time the meaning of “manufactured” for the purposes of 28 USC § 1498, the US Court of Appeals for the Federal Circuit affirmed the US Court of Federal Claims’ interpretation of “manufactured” as being in a state “suitable for use.” FastShip, LLC v. United States, Case Nos. 17-2248; -2249 (Fed. Cir., June 5, 2018) (Wallach, J).
FastShip owns two patents related to a ship whose hull design in combination with a waterjet propulsion system permits transit speeds of up to 40–50 knots in high or adverse sea states. FastShip brought suit against the US government under § 1498, which allows a patent owner to bring an action for infringement against the government where the invention described is “used or manufactured by or for the United States without license of the owner.”
The dispute centered around two contractor-built lines of Littoral Combat Ships (LCS) used by the US Navy: the LCS-1, which began construction in February 2005 and was launched in September 2006, and the LCS-3, which began construction in July 2009 and was launched in December 2010. Because of construction delays, the LCS-3 waterjets were not installed until July 2010, and the hull was delayed until August 2010. The asserted patents expired on May 18, 2010.
Prior to trial, the US government moved for summary judgment on the issue of LCS-3 infringement, arguing that the LCS-3 was not “manufactured” within the meaning of § 1498 prior to the expiration of the patent term. The claims court granted the government’s motion and, after a bench trial, found that the LCS-1 infringed and awarded damages to FastShip. FastShip appealed the finding as to the LCS-3, and the government appealed the finding as to the LCS-1.
The Federal Circuit affirmed both findings, with a slight modification to the damages amount due to “inadvertent [mis-]copying” of the numbers used to determine the reasonably royalty. With respect to the LCS-1 infringement finding, the government argued that the lower court improperly modified its construction of the term “increases the efficiency of the hull” because it converted LCS-1 shaft power measurements from imperial to metric units in order to compare values with graphs in the asserted patents. In affirming the lower court’s ruling, the Federal Circuit found that the decision was not clearly erroneous, as the lower court “needed to assure itself that the graphs expressed efficiency ratios in the same unit of measure.” Therefore, the construction was “at most [a] clarifi[cation]” of its previous decision.
The bulk of the Federal Circuit’s LCS-3 analysis centered on the definition of the term “manufactured.” The Court analyzed the plain meaning, context and legislative history of the term, ultimately finding that “manufactured” requires “each limitation of the claims” to be “suitable for use.” Because the LCS-3 waterjets and hull were not “suitable for use” prior to the expiration of the asserted patents (having missed the crucial date by mere months), the LCS-3 was not “manufactured” within the meaning of § 1498. Thus, there was no infringement with respect to the LCS-3.
Practice Note: The Federal Circuit noted that its definition of “manufactured” is consistent with the Supreme Court of the United States’ 2012 decision in Samsung Elecs v. Apple (IP Update, Vol. 15, No. 12), where it interpreted “manufacture” the same way in the context of 35 USC § 289. Thus, while the FastShip decision is only applicable to § 1498, broadly interpreted, the Court’s definition of “manufactured” may have precedent throughout Title 35.
Prior Art May Teach Away From a Formulation despite Reference to It
Deferring to the district courts findings of fact regarding a prior art reference “teaching away”, the US Court of Appeals for the Federal Circuit upheld a decision finding patents directed toward intranasal formulations for treating migraines were non-obvious. Impax Laboratories Inc. v. Lannett Holdings Inc., Case No. 17-2020 (Fed. Cir. 2018) (Lourie, J.)
AstraZeneca owns the two asserted patents relating to pharmaceutical formulations of zolmitriptan for intranasal administration. Zolmitriptan belongs to a class of drugs known as triptans, which work as selective serotonin receptor agonists and are used to treat migraines and cluster headaches. Impax is the exclusive licensee of the asserted patents.
AstraZeneca also owns a New Drug Application (NDA) for Zomig (brand name for zolmitriptan) formulated as a nasal spray for treatment of migraines. In June of 2014, Lannett notified AstraZeneca that it had filed an Abbreviated New Drug Application (ANDA) along with a paragraph IV certification stating that AstraZeneca’s patents were invalid or unenforceable. Impax filed suit.
At trial, Lannett stipulated to infringement, but argued that the asserted claims of the asserted patent were invalid under 35 U.S.C. §§102 & 103. After a bench trial, the district court found that the asserted claims were not invalid, entering a judgment in favor of Impax and entering an injunction against Lannett to prevent its entry into the market. Lannett appealed.
The only issue on appeal is the district court’s non-obviousness finding. At trial Lannett had raised obviousness arguments based on “Marquess”, “Chauveau” and “Stewart & Tepper”. At the outset, the Federal Circuit determined that Lannett had waived any invalidity argument as to Marquess and Stewart & Tepper because Lannett alluded to these references teaching nasal formulations of zolmitriptan without making any particular invalidity arguments based on these references.
The Federal Circuit next analyzed the obviousness argument based on Chauveau—a patent which is generally directed to formulating an active ingredient for use in intranasal drug delivery. The Chauveau patent offered a laundry list of potential ingredients including triptans, such as sumatriptan and zolmitriptan. The district court, however, discounted this disclosure, explaining that these formulations were barely mentioned, that the reference as a whole was not about intranasal formulations of zolmitriptan, and that the reference taught away from using an intranasal formulation to deliver zolmitriptan. As taught in the Chauveau patent, intranasal formulations are generally advantageous because they prevent the rapid break down of the drug that oral formulations experience in the digestive system. However, zolmitriptan is known to be active by way of its metabolite (i.e. its breakdown product). This is a unique property to zolmitriptan and most triptans do not rely on their metabolite for efficacy.
Ultimately, the district court called the case a close one, finding that while zolmitriptan was expressly listed as a potential active ingredient in the Chauveau patent, the passing reference was not enough. The district court found that the fact that zolmitriptan had a known powerful metabolite, the creation of which would be delayed and diminished by nasal administration, would point a skilled artisan away from including zolmitriptan in a nasal spray. The Federal Circuit agreed that this case was close, and deferred to the district court in its fact findings, including what Chauveau discloses and the state of the prior art as a whole.
Lannett also argued that the district court erred in finding that a 2012 agreement which encompassed the entire Zomig franchise, including matters unrelated to the asserted patents, supported its conclusion of non-obviousness. Based on the timing of the 2012 agreement as it related to the various formulation patents and the sales data presented to the district court, the Federal Circuit found that a portion of the consideration exchanged was based on expected profits from the Zomig spray. These conclusions were also supported by corroborating evidence in Impax’s press release and the Federal Circuit saw no error in the district court’s use of the 2012 agreement between Impax and AstraZeneca as an objective indicia of non-obviousness.
Practice Note: Overturning a finding of obviousness at the Federal Circuit is an uphill battle. The Federal Circuit has repeatedly deferred to the district court for “close cases”. This is a fact driven analysis and appellants should rely heavily on the trial record and avoid conclusory obviousness arguments without evidentiary support.
America Invents Act
If at First Your IPR Doesn’t Succeed, Don’t Try Again
Exercising its discretion under 35 USC § 314(a), the Patent Trial and Appeal Board (PTAB) declined to institute inter partes review (IPR) because the petitioner had (1) previously submitted a petition for IPR on similar grounds, (2) could not explain the delay in filing its second petition and (3) knew of the asserted prior art at the time of filing its first petition. Alcatel-Lucent USA Inc. v. Oyster Optics, LLC, Case No. IPR2018-00257 (PTAB, June 4, 2018) (Kenny, APJ).
Oyster owns a patent directed to transceiver cards used by a telecommunications box for transmitting and receiving data over multiple optical fibers. Oyster filed suit against a number of companies, including Alcatel, in the Eastern District of Texas and the Northern District of California alleging infringement of the patent.
In July 2017, Alcatel served its invalidity contentions in its district court litigation. In October 2017, Alcatel filed its first IPR petition requesting review of all relevant claims of the asserted patent, and in December 2017, Alcatel filed its second IPR petition, which identified nine asserted references. Six of these references were cited in Alcatel’s invalidity contentions, and another was cited in a co-defendants’ contentions.
Under § 314(a), the PTAB can invoke its discretion to deny institution based on a follow-on petition on the same patent. The PTAB considers the following factors:
- Whether the petitioner previously filed a petition directed to the same claims
- Whether the petitioner knew or should have known of the asserted prior art at the time of the first petition
- Whether the petitioner received the patent owner’s response to the first petition before filing the second petition
- The amount of time between the petitioner’s discovery of the asserted prior art and the filing of the second petition
- The petitioner’s explanation for the time between the first and second petitions
- The PTAB’s resources
- The requirement to issue a final determination within one year of institution
Here, the PTAB determined that a majority of the factors weighed against institution. It found that Alcatel had previously filed a petition directed to the same claims and knew of at least seven of the nine asserted references at the time the first petition was filed. The PTAB was unconvinced by Alcatel’s arguments with respect to an additional “new” reference, Moulton, which was not cited in the district court litigation. Instead of identifying when it first discovered the Moulton reference, Alcatel argued that it “became aware of Moulton’s [specific] teaching” after filing the first petition. The PTAB found that since Alcatel failed to identify when it became aware of Moulton itself, rather than the specific teaching relied upon, Alcatel failed to provide an adequate explanation for its delay.
Federal Circuit Zeros in on Genericness and Acquired Distinctiveness
Addressing the proper analysis for assessing genericness and acquired distinctiveness of a trademark, the US Court of Appeals for the Federal Circuit vacated a US Trademark Trial and Appeal Board (TTAB) decision denying an opposition to applications filed by one soft drink company against the applications of another to register various trademarks containing the word ZERO. Royal Crown Company, Inc. et al. v. The Coca-Cola Company, Case No. 16-2375 (Fed. Cir., June 20, 2018) (O’Malley, J).
Royal Crown makes and distributes beverages under various trademarks, including the marks DIET RITE PURE ZERO and PURE ZERO. Royal Crown applied to register these two trademarks and disclaimed the word ZERO. Coca-Cola also makes and distributes beverages under various trademarks that include the word ZERO, such as COKE ZERO. Coca-Cola also applied to register many of its ZERO trademarks. The US Patent and Trademark Office (PTO) issued an office action asking Coca-Cola to disclaim the word ZERO because the term merely describes the calorie or carbohydrate content of the goods. In response, Coca-Cola argued that its various ZERO marks had acquired distinctiveness, and refused to disclaim ZERO. The PTO accepted Coca-Cola’s evidence of acquired distinctiveness and published Coca-Cola’s various ZERO applications without a disclaimer of the word ZERO.
Royal Crown opposed Coca-Cola’s various ZERO applications, contending that (1) ZERO was generic when applied to certain beverages, and (2) ZERO was merely descriptive and could not indicate the source of Coca-Cola’s products. Rather than arguing that Coca-Cola’s applications should all be refused, Royal Crown only sought to require Coca-Cola to disclaim ZERO in its applications. The TTAB rejected Royal Crown’s arguments on both points, and Royal Crown appealed.
On appeal, the Federal Circuit criticized the TTAB’s genericness analysis. The proper test for assessing whether a term is generic asks:
- What is the genus for the goods or services at issue?
- Is the term sought to be registered understood by the relevant public to primarily refer to that genus of goods or services?
The TTAB found that the relevant genus was soft drinks, sport drinks and energy drinks, but failed to consider that the relevant genus included a subcategory of zero-calorie or zero-carbohydrate beverages. The Court cited its decision in In re Cordua (IP Update, Vol. 19, No. 6) and stated that a term is generic if the relevant public understands the term to refer to part of the claimed genus or services, even if the public does not understand the term to refer to the broad genus as a whole. The Court explained that the TTAB also failed to consider whether ZERO would be generic for a subcategory of the genus of soft drinks, sport drinks and energy drinks—zero-calorie or zero-carbohydrate beverages. The Court vacated the TTAB’s decision and ordered the TTAB to consider whether ZERO refers to a key aspect of zero-calorie or zero-carbohydrate beverages.
The Federal Circuit also considered whether the TTAB erred in determining that Coca-Cola had proven that its various ZERO marks had acquired distinctiveness. On this issue, the Court found that the TTAB had committed a significant flaw by failing to determine whether Coca-Cola’s ZERO marks were highly descriptive or merely descriptive. The more descriptive a mark is, the more evidence is necessary to demonstrate that a mark has acquired distinctiveness. As the Court explained, the TTAB failed to specify the evidentiary burden Coca-Cola needed to meet to show that its ZERO marks were eligible for registration.
In reviewing the TTAB’s examination of Coca-Cola’s evidence of acquired distinctiveness, the Federal Circuit noted the TTAB’s reliance on a survey from 2008 and a reference to Coca-Cola’s “family” of ZERO marks. The Court noted that acquired distinctiveness was a time-related concept and questioned the probative value of a survey conducted more than five years before the close of testimony before the TTAB. The Court also doubted that the family of marks doctrine would help demonstrate the acquired distinctiveness necessary to support registration of Coca-Cola’s ZERO marks, given the fact that Coca-Cola would still need to demonstrate that the shared feature of the family of marks—ZERO—was distinctive.
When Your Business Address Is a Trademark: Description of Historical Location Is Fair Use
The US Court of Appeals for the Sixth Circuit found that the defendant’s use of the names “Old Taylor” and “the Former Old Taylor Distillery” (collectively, the Old Taylor names) to refer to its property and future bourbon distillery located on the site of the original 1887 distillery of the same name qualifies as fair use and does not infringe on the OLD TAYLOR and COLONEL E.H. TAYLOR trademarks. Sazerac Brands, LLC v. Peristyle, LLC, Case No. 17-5933/5997 (6th Cir., June 14, 2018) (Sutton, J).
Judge Sutton’s opinion opens with a love note to the state of Kentucky and its “richly preserved history of bourbon making.” The opinion explains that Colonel Edmund Haynes Taylor is considered the founder of the modern bourbon industry and built the Old Taylor Distillery in Woodford County, Kentucky, in 1887. The building, which resembled a medieval limestone castle, eventually fell into disrepair and decay, and bourbon production at the facility ended in 1972.
In 2014, a team of Kentucky natives formed Peristyle and purchased the Old Taylor Distillery with plans to renovate the castle and resume bourbon production. Peristyle renamed the property “Castle & Key.” In four years, when its first batch of bourbon will be available for sale, the company plans to sell the product under the CASTLE & KEY trademark.
During renovation of the distillery, Peristyle released marketing posters, advertisements and social media posts referring to its location as “the Former Old Taylor Distillery” or “Old Taylor,” which prompted a lawsuit by Sazerac, a distiller that bought the rights to the OLD TAYLOR and COLONEL E.H. TAYLOR trademarks in 2009. The district court granted summary judgment to Peristyle on Sazerac’s claims of trademark infringement, unfair competition and passing-off, finding that Peristyle used the Old Taylor names descriptively and in good faith under the Lanham Act’s affirmative defense of fair use. Sazerac appealed.
The Sixth Circuit explained that the fair use defense applies when “the use of the name, term, or device charged to being an infringement is a use, otherwise than as a mark . . . of a term or device which is descriptive of and used fairly only to describe the goods or services of such party, or their geographic origin.” Thus, the two elements of fair use require that the defendant (1) use a name or term in a descriptive or geographic sense, and (2) do so fairly and in good faith.
The Sixth Circuit found that Peristyle satisfied both elements, noting that Peristyle used the Old Taylor names only to identify the historic location where it would be producing its CASTLE & KEY bourbon, and that it did so in good faith, since the record established that Peristyle continually recognized that the OLD TAYLOR trademarks belong to Sazerac and thus selected its own brand for its eventual bourbon product.
The Sixth Circuit also dismissed Sazerac’s arguments alleging that Peristyle infringed the OLD TAYLOR trademarks by displaying “Old Taylor Distillery” signs on the building and using the property for commercial activities, such as hosting a wedding and renting out barrel-aging warehouse space. The Court noted that both signs in question adorned the building before Peristyle purchased it, which the Court considered confirmation that the company did not put them there or otherwise use them in bad faith. On the issue of “commercial activities,” the Court clarified that what matters is not commercial or non-commercial activity, but whether Peristyle used the Old Taylor names descriptively or non-descriptively.
Finding that Peristyle’s use of the Old Taylor names to describe the location of its events or services was “fair use at each turn,” the Sixth Circuit confirmed that Peristyle’s commercial activity did not equate to non-descriptive trademark use. Thus, the Court affirmed the district court’s summary judgment grant for Peristyle holding that the company’s use of the distillery name “finds shelter under the Lanham Act’s fair use defense.”
Is a Color Mark Functional? First, Consider the Alternatives
The US Court of Appeals for the Ninth Circuit reversed a grant of summary judgment, finding a genuine issue of material fact as to whether the green color of the plaintiff’s earplugs was functional. Moldex-Metric, Inc. v. McKeon Products, Inc., Case No. 16-55548 (9th Cir., June 5, 2018) (Piersol, J).
Moldex produces foam earplugs with a specific bright green color. After McKeon began using a similar color for its earplugs, Moldex sued for trademark infringement. In response, McKeon claimed the green color mark was functional and thus not protectable as trade dress because the green color increased the visibility of the earplugs during safety compliance checks. The district court agreed and granted summary judgment in favor of McKeon. Moldex appealed.
On appeal, Moldex argued that the district court erred by failing to consider in its functionality analysis whether alternative colors were available. The Ninth Circuit first surveyed the functionality tests in its precedents, finding the existence or nonexistence of alternative designs as probative evidence of a mark’s functionality. The Court also examined the traditional functionality tests set forth in Supreme Court of the United States cases TrafFix Devices (IP Update, Vol. 4, No. 4), Qualitex and Inwood Laboratories, which assess whether a feature is essential to the use or purpose of a product or whether exclusive use of a feature would interfere with competition. The Ninth Circuit explained that analyzing the availability of alternative designs becomes more important when traditional functionality tests are difficult to apply.
The Ninth Circuit found that the district court failed to properly consider the importance of alternative colors in evaluating the functionality of Moldex’s color mark. Because a reasonable jury could conclude that Moldex’s evidence of alternative colors outweighs McKeon’s evidence of the green color’s utilitarian benefit, the Court found that a dispute of material fact remained and thus summary judgment on functionality was not appropriate.
The Louboutin Saga: Victory, for Now
The Court of Justice of the European Union (CJEU) ruled that a mark (or “sign,” in EU parlance) consisting of a color applied to the sole of a high-heeled shoe does not consist exclusively of a “shape” within the meaning of Article 3(1)(e)(iii) of Directive 2008/95/EC (Directive). Christian Louboutin and Christian Louboutin SAS v. Van Haren Schoenen BV, Case No. C-163/16 (CJEU, June 12, 2018).
In 2013, Christian Louboutin and his eponymous French company sued Van Haren Schoenen BV, which sold high-heeled shoes with red soles in the Netherlands, for infringement of Christian Louboutin’s Benelux trademark. This Benelux trademark represents a high-heeled shoe with a red sole and is described as follows: “the mark consists of the color red (Pantone 18-1663TP) applied to the sole of a shoe as shown (the contour of the shoe is not part of the trademark but is intended to show the positioning of the mark).”
Van Haren Schoenen argued that the trademark was invalid on the basis of Article 2.1 of the Benelux Convention (corresponding to Article 3(1)(e)(iii) of the Directive), according to which marks consisting exclusively of a shape that gives substantial value to the goods cannot be considered as trademarks.
The Dutch courts stayed the proceedings and asked the CJEU to consider whether the notion of “shape,” within the meaning of Article 3(1)(e)(iii) of the Directive, is limited to the three-dimensional properties of the goods (such as the contours, measurements and volume), and does not include other (non-three-dimensional) properties of the goods, such as their color.
After noting that a color per se may not constitute a “shape,” the CJEU considered whether a particular color applied to a specific part of the product results in a protectable “shape.” The CJEU determined that a mark consisting of a color applied to the sole of a high-heeled shoe does not consist of a shape since (1) it is not the shape that the trademark seeks to protect, and (2) the mark does not relate to a specific shape of a sole for high-heeled shoes. Additionally, the CJEU found that the mark in issue cannot be regarded as consisting “exclusively” of a shape, since the main element of the mark is a specific color.
This decision clarifies that arguments under Article 3(1)(e)(iii) of the Directive, related to marks consisting exclusively of a shape, can no longer be used within European Union to claim invalidity of the Louboutin red sole trademark.
Practice Note: This decision is positive for Christian Louboutin, who actively sues third parties around the world selling high-heeled shoes with red soles. However, Article 3(1)(e)(iii) of the Directive has been replaced by new Article 4(1)(e)(iii) of Directive 2015/2436 of December 16, 2015, which must be implemented by Member States by January 14, 2019. Pursuant to this new article, “signs [i.e., marks] which consist exclusively of: [. . .] the shape, or another characteristic, which gives substantial value to the goods” shall not be registered or shall be declared invalid. Thus new questions arise: shall a color be considered as “another characteristic,” and, if so, will the well-known Louboutin red sole be found to give substantial value to high-heeled shoes? To be continued.
Plaintiffs Walk Out in Shame After Attorneys’ Fees Award Affirmed
Addressing the proper analysis for awarding attorneys’ fees and costs under the Copyright Act in the wake of the Supreme Court of the United States’ ruling in Kirtsaeng v. John Wiley & Sons, the US Court of Appeals for the Ninth Circuit upheld a fee award to the defendants where the copyright claim was objectively unreasonable. Shame on You Productions, Inc. v. Banks, Case No. 16-55024 (9th Cir., June 21, 2018) (Smith, J).
In May 2014, actor Elizabeth Banks and others (collectively, Banks) released a film titled Walk of Shame. Just prior to the movie’s release, Shame on You Productions, Inc., (SOYP) sent Banks letters claiming that her film copied elements from SOYP president David Rosen’s screenplay, titled “Darci’s Walk of Shame.” According to Rosen, he had previously sent the screenplay to Banks and even met with the actor in 2007 in the hope that she might star in his movie, although nothing came of the meeting. When Banks failed to produce the documents requested in SOYP’s letters, SOYP sued for copyright infringement.
After protracted discovery disputes, the district court ultimately granted Banks’s motion for judgment on the pleadings, finding that “as a matter of law there was no substantial similarity between the two works.” Thereafter, Banks filed a motion for attorneys’ fees and costs, which the district court granted, awarding Banks approximately $319,000. SOYP appealed.
On appeal, SOYP argued that the district court, in assessing whether to award attorneys’ fees, had failed to consider the Supreme Court’s ruling in Kirtsaeng v. John Wiley & Sons (IP Update, Vol. 19, No. 6), which had issued only two months prior to the district court decision. The Ninth Circuit disagreed, further noting that “Kirtsaeng did not effect a significant change in the law.”
Typically, courts in the Ninth Circuit consider the following nonexclusive factors when determining whether to award attorneys’ fees and costs under the Copyright Act: “(1) the degree of success obtained, (2) frivolousness, (3) motivation, (4) reasonableness of losing party’s legal and factual arguments, and (5) the need to advance considerations of compensation and deterrence.” The shift post-Kirtsaeng merely requires that courts give “substantial weight to the fourth factor,” the Court said.
In this case, the district court’s determination of objective unreasonableness was based on the lack of similarities between the works. The district court found that “the two works at issue tell fundamentally different stories with different plots, themes, dialogues, moods, settings, paces, and characters.” Although Kirtsaeng dictates that substantial weight should be given to the fourth factor—the reasonableness of the losing party’s claim (or lack thereof)—the remaining factors should still be taken into account. In this particular case, the other factors “do not combine to outweigh the objective unreasonableness of SOYP’s claim,” according to the Ninth Circuit.
The Ninth Circuit further concluded that (1) the district court did not err in declining to apportion fees because the Copyright Act claim and state law claim for breach of an implied contract were interrelated, (2) the fee award was reasonable, and (3) the motion for fees and costs had been timely filed.
Practice Note: Kirtsaeng has not fundamentally changed the analysis for awarding attorneys’ fees in copyright cases; it has only shifted the emphasis to the unreasonableness factor.
Innocent Until Proven Knowledgeable
The US Court of Appeals for the Ninth Circuit clarified the requirements of § 1202 of the Digital Millennium Copyright Act, particularly with respect to copyright management information (CMI), holding that this section was specifically drafted to limit liability to actors who “know or have reason to know that [their] acts ‘will induce, enable, facilitate or conceal’” infringement. Stevens v. CoreLogic, Inc., Case No.16-56089 (9th Cir., June 20, 2018) (Berzon, J).
Copyright law restricts the removal or alteration of CMI, which includes information such as the title, author, copyright owner, terms and conditions for use of the work, and other identifying information set forth in a copyright notice or conveyed in connection with the work. 17 USC § 1202(b)-(c).
This case involves Exchangeable Image File Format (EXIF) and IPTC metadata, both of which can contain CMI under the copyright statute. Most digital cameras use EXIF metadata to store information about when the photograph was taken and under what technical conditions (e.g., shutter speed, aperture). IPTC metadata is added manually, either by programming the camera or by adding the information after taking the picture using photo editing software, and can include the title of the image, a caption or description, keywords, information about the photographer and copyright restrictions. Fields such as Author/Creator, Copyright and Caption/Description can exist in both EXIF and IPTC formats.
The plaintiffs are two professional real estate photographers who take photographs of listed properties and license these photographs to real estate agents, who in turn upload the photographs to Multiple Listing Services (MLS), a computerized database of listed properties. The plaintiffs sued CoreLogic, a company that develops and provides software to MLS, alleging that CoreLogic removed CMI from their photographs and distributed the altered photographs in violation of § 1202(b)(1)-(3). Because of the size of image files, CoreLogic’s MLS software resizes images to reduce storage size and to improve upload speed on webpages, using software that is unable to read or write EXIF data. Thus, this process results in the loss of metadata attached to images. The suit does not relate to visible CMI, such as digital watermarks, which CoreLogic’s software does not remove from the photographs. Rather, the case is limited to removal of metadata. Following a grant of summary judgment by the district court, plaintiffs appealed.
On appeal, the Ninth Circuit focused its analysis on the knowledge requirement of § 1202, which provides: “No person shall, without the authority of the copyright owner or the law . . . intentionally remove or alter any copyright information . . . knowing, or . . . having reasonable grounds to know, that it will induce, enable, facilitate, or conceal an infringement of any” copyright. § 1202(b)(1) (emphasis added). Similarly, § 1202(b)(3) provides: “No person shall, without the authority of the copyright owner or the law . . . distribute, import for distribution, or publicly perform works, copies of works, or phonorecords, knowing that copyright management information has been removed or altered without authority of the copyright owner or the law, knowing, or . . . having reasonable grounds to know, that it will induce, enable, facilitate, or conceal an infringement of any” copyright (emphasis added).
The legislative history of § 1202 demonstrates that the provision was drafted to specifically limit liability to actors who “know or have reason to know that [their] acts ‘will induce, enable, facilitate or conceal” infringement. Thus, the Ninth Circuit found that a plaintiff bringing a claim under this section must make an affirmative showing, such as by demonstrating a past “pattern of conduct” or “modus operandi,” that the defendant was aware of the probable future impact of its actions.
The Court found that plaintiffs failed to offer any evidence to satisfy the mental state requirement in § 1202. Instead, the photographers merely alleged that, because one method of identifying an infringing photograph had been impaired, someone might be able to use their photographs undetected. Lacking any specific evidence that removal of CMI metadata from the real estate photographs would impair the plaintiffs’ policing of infringement, thus making future infringement likely to occur as a result of the removal or alternation of the CMI, the Ninth Circuit affirmed the grant of summary judgment.
Sly Slick & Wicked Revived
The US Court of Appeals for the Second Circuit affirmed a dismissal of the plaintiffs’ state law claim for failure to allege a fiduciary duty, and vacated and remanded a judgment on a motion to dismiss as to the plaintiffs’ renewal term copyright claims for being time barred, finding no obligation for the band to have earlier sued the publisher in order to maintain its right to the renewal term. Wilson, et al. v. Dynatone, et al., Case No. 17-1549 (2d Cir., June 6, 2018) (Leval, J).
The predicate timeline is complicated. John Wilson, Charles Still and Terrance Stubbs are former members of the band Sly Slick & Wicked. In 1973, while traveling with the band, Wilson wrote the song “Sho’ Nuff.” The band promptly (on May 12, 1973) registered the composition and sound recording with the US Copyright Office. A month later, the promoter filed a registration with BMI listing Perrell Music, Belinda Music and Dynatone Music as the publishers. Approximately a year later, Chappell & Co. filed a registration of the song with the Copyright Office listing the band as the writers and Dynatone as the claimant. Then, on November 19, 2015, the band filed a renewal registration with the Copyright Office, asserting ownership of the renewal term for the song. The band had not executed any agreement with the prior publishers transferring interests in the renewal term.
The band made a sound recording of the song with People Records, which modified the recording with the addition of strings and bells. In June 1973, Polydor, successor to People Records, registered a copyright in the sound recording, claiming the recording was a work for hire. The band, however, never executed an agreement with People Records that included a work for hire provision and never transferred its renewal terms. On December 21, 2001, Universal Music Group (UMG) registered a renewal term copyright in the sound recording with the Copyright Office.
In 2013, “Sho’ Nuff” was sampled by Justin Timberlake in the song “Suit & Tie” and by J. Cole in “Chaining Day.” The band members sued Dynatone, UMG and Unichappell Music, asserting that they owned the copyrights in the song and the sound recording, and sought an accounting of the defendants’ profits from their use of the song in the preceding three years. The district court granted defendants’ motion to dismiss pursuant to Rule 12(b)(6), reasoning that the claims were time‐barred because the defendants had repudiated plaintiffs’ claims of copyright ownership many years earlier, during the initial copyright terms. The band appealed.
The Second Circuit explained that while the publishers may have repudiated the band’s claims to the initial copyright terms in the song and sound recording in the 1970s, they did not repudiate the band’s ownership of the renewal terms. The Court explained that as the authors of the song and sound recording, the band members were entitled to the renewal terms regardless of whether they abandoned their rights to the initial terms. The Court stated that the renewal terms automatically vested with them.
The Second Circuit found no facts supporting UMG’s argument that the action was time barred, concluding that UMG’s 2001 registration of the renewal term did not trigger an obligation on the band to sue. The Court pointed out that if the mere registration of a copyright triggered the accrual of a copyright ownership claim, then owners would be forced to maintain constant vigilance over new registrations. In this case, Justin Timberlake’s sampling began on January 15, 2013, and the plaintiffs filed their complaint on January 6, 2016, within the three-year statute of limitations.
The Second Circuit agreed with the lower court’s finding that the complaint failed to allege that the defendants owed the band a fiduciary duty, which is a requirement for the accounting claim. The Court noted, however, that its affirmance did not bar the plaintiffs from employing discovery to learn of revenues collected by the defendants and seeking an award under their copyright claims.
New German Trade Secrets Law: Next Steps for Businesses
Germany recently introduced a new act that will substantially change the way trade secrets are protected. As the term is used in Germany, “trade secrets” include both technical know-how (such as construction drawings, manufacturing methods, ingredients and recipes) and business information (such as customer data, purchase prices and market studies). The first draft of the new act was presented on April 19, 2018, and some of the changes are already relevant. Enterprises doing business in Germany should be aware of the new opportunities, risks and requirements under the act:
- Only information that is subject to actual and reasonable measures to maintain secrecy will be protected as a trade secret. As a result, enterprises may have to adopt additional contractual, organizational and technical measures to protect their trade secrets. In order to be in a position to enforce trade-secret-derived claims against third parties, enterprises should immediately start documenting the protection measures they adopt.
- Reverse engineering is permitted, except when otherwise contractually agreed. Enterprises therefore may want to include clauses against reverse engineering in agreements with third parties such as suppliers, customers and R&D partners. However, reverse engineering will still be possible for competitors and other third parties.
- Under the new law, an enterprise may be liable for infringement of trade secrets even if its management has not acted culpably. This change facilitates enforcement against competitors but at the same time creates risk in terms of defending against third-party claims.
- In addition to claims for injunctive relief, damages and information, infringers may be liable for recall and destruction of products that were manufactured and marketed as a consequence of infringement of a trade secret.
The basis of the new act is EU Directive 2016/943 on the protection of undisclosed know-how and business information (trade secrets). This Directive had to be implemented into national laws by June 9, 2018. Where the Directive has not yet been implemented, such as in Germany, individuals may to a certain extent rely on the Directive itself, arguing that the existing national law must be construed in a way that brings it in line with the Directive.
Therefore, enterprises doing business in Germany should take the following steps:
- Establish a process for identifying and categorizing proprietary information and the people who have access to such information, and evaluate the protection status. This process should be reviewed and conducted on a regular basis, because new information may be generated continuously.
- Make a strategic decision about the extent to which secrecy is sufficient to protect proprietary information, and whether intellectual property rights, such as patents, should be obtained. Secrecy gives no protection against independent developments by competitors, and maintaining secrecy of technical information may become increasingly difficult as powerful technical means of reverse engineering continue to emerge. Patents also can provide effective protection against a competitor’s subsequent independent developments. Patents are easier to license out and may be easier to use for advertisement purposes. At the same time, patents have a limited lifetime, make proprietary information available even in regions where no protection is sought, and are associated with costs such as annual renewal fees.
- Define clear responsibilities and access rights for proprietary information. The more important the secret information is for the company’s business, the more restrictive its access rights should be. This applies both to internal access and to provision of information to external parties, such as customers. Access to important and proprietary information should be granted on a need-to-know basis only. It is also helpful to establish a safety culture through regular training and clear rules for dealing with private and business IT devices such as storage media, and regarding what data that may (or may not) be taken on business trips abroad.
- Make use of available contractual means to protect secrecy, such as confidentiality clauses in employee contracts and post-contractual non-compete clauses. The latter should only be considered in contracts with key employees, because these clauses must be drafted in a case-specific manner, and a post-contractual restraint will incur costs for the employer. Trade secrets also must be protected (especially against reverse engineering) in contracts with third parties such as customers, suppliers, licensees or R&D partner via non-disclosure agreements (NDAs). NDAs often include contractual penalties.
- Establish IT measures to protect secret information. Such measures include firewalls, encryption, monitoring access to information, and rules on the use of private storage media.
Supreme Court to Clarify Meaning of Registration under Copyright Act
The US Supreme Court granted Fourth Estate Public Benefit Corporation’s petition for certiorari. Fourth Estate Public Benefit Corporation v. Wall-Street.com, Case No. 17-571 (Supr. Ct. June 28, 2018). The question presented is:
Whether the “registration of [a] copyright claim has been made” within the meaning of 17 U.S.C. § 411(a) when the copyright holder delivers the required application, deposit, and fee to the Copyright Office, as the U.S. Courts of Appeal for the 5th and 9th Circuits have held, or only once the Copyright Office acts on that application, as the U.S. Courts of Appeals for the 10th and, in the decision below, the 11th Circuits have held.
Fourth Estate is a news organization that produces online journalism, licensing articles to websites but retaining the copyright to the articles. Wall-Street.com, a news website, obtained licenses to a number of articles produced by Fourth Estate. The license agreement required Wall-Street to remove all of the content produced by Fourth Estate from its website before Wall-Street cancelled its account. However, when Wall-Street cancelled its account, it continued to display the articles produced by Fourth Estate. Fourth Estate filed a copyright infringement claim, alleging the suit was proper because Fourth Estate had filed applications to register the articles. Wall-Street moved to dismiss the complaint, arguing that the Copyright Act permits a suit for copyright infringement only after the Copyright Office approves or denies the application to register the copyright and simply filing an application does not permit the suit. The district court agreed, dismissing the complaint without prejudice and the Court of Appeals for the Eleventh Circuit affirmed the district court’s decision.
Supreme Court to Consider Whether Confidential Sale Triggers On-Sale Bar
The US Supreme Court granted certiorari to consider the question of whether, under the America Invents Act, an inventor’s sale of an invention to a third party that is obligated to keep the invention confidential qualifies as prior art for purposes of determining the patentability of the invention. Helsinn Healthcare v. Teva Pharmaceuticals, Case No. 17-1229 (Supr. Ct. June 25, 2018). The question presented is:
Whether, under the Leahy-Smith America Invents Act, an inventor’s sale of an invention to a third party that is obligated to keep the invention confidential qualifies as prior art for purposes of determining the patentability of the invention.
Helsinn is the owner of the four patents-in-suit directed to intravenous formulations of palonosetron for reducing or reducing the likelihood of chemotherapy-induced nausea and vomiting. Helsinn filed suit against Teva alleging that the filing of Teva’s Abbreviated New Drug Application constituted an infringement of various claims of those patents. Teva defended against the suit, arguing the asserted claims were invalid under the on-sale bar provision of 35 U.S.C. § 102 based the sale of patent products under a confidentiality agreement. The district court found that the patents-in-suit were not invalid. With respect to three of the patents, which are governed by the pre-America Invents Act version of § 102, the district court concluded that there was a commercial offer for sale before the critical date, but that the invention was not ready for patenting before the critical date. With respect to the fourth patent, which is governed by the AIA version of § 102, the district court concluded that there was no commercial offer for sale because the AIA changed the relevant standard and that, in any event, the invention was not ready for patenting before the critical date.
The Federal Circuit reversed the district court, finding asserted claims of the patents-in-suit were subject to an invalidating contract for sale prior to the critical date of January 30, 2002, and the AIA did not change the statutory meaning of “on sale” in the circumstances involved. The Court also found that the asserted claims were also ready for patenting prior to the critical date. Helsinn appealed to the Supreme Court.