Overruling Achates: PTAB Time-Bar Decisions Are Reviewable
In an en banc decision, the US Court of Appeals for the Federal Circuit overruled its previous decision in Achates Reference Publishing v. Apple (IP Update, Vol. 18, No. 10) and found that the bar on judicial review of institution decisions under 35 USC § 314(d) does not apply to decisions rendered by the Patent Trial and Appeal Board (PTAB) on whether an inter partes review (IPR) proceeding is time-barred under 35 USC § 315(b). Wi-Fi One, LLC v. Broadcom Corp., Case Nos. 2015-1944; -1945; -1946 (Fed. Cir., Jan. 8, 2018) (en banc) (Reyna, J, joined by Prost, CJ, and Newman, Moore, O’Malley, Wallach, Taranto, Chen and Stoll, JJ) (O’Malley, J, concurring) (Hughes, J, dissenting, joined by Lourie, Bryson and Dyk, JJ).
An institution decision made by the PTAB in an IPR proceeding is final and non-appealable under 35 USC § 314(d). Under § 315(b), an IPR is time-barred and thus may not be instituted if the petition requesting the proceeding is filed more than one year after the date on which the petitioner, a real party in interest or a privy of the petitioner is served with a complaint alleging infringement of the patent. A number of factors are relevant in determining whether a party is a real party or is in privy with another party. For example, one factor that may be considered is whether the non-party to the IPR proceeding exercised or could exercise control over a party’s participation in the IPR proceeding.
In its earlier Achates decision, the Federal Circuit found that a PTAB determination as to whether a petition is time-barred is final and non-appealable. Subsequently, the Supreme Court of the United States decided in Cuozzo Speed Technologies that the PTAB’s ruling on whether a petition was pleaded with particularity is not reviewable (IP Update, Vol. 19, No. 7). The Supreme Court left open the possibility of judicial review for decisions that are not closely tied to the application and interpretation of statutes related to the institution decision.
In this case, the en banc Federal Circuit revisited and overruled Achates, noting “the strong presumption favoring judicial review of administrative actions” and the absence of clear and convincing congressional intent to bar the review. The majority also found that its decision was consistent with the statutory scheme “as understood through the lens of” the Supreme Court’s decision in Cuozzo. Specifically, the majority found that the time-bar is not closely tied to the institution decision and thus falls within one of the examples of potential judicial review outlined in Cuozzo.
Judge O’Malley concurred. Her concurrence turned on the distinction between the Director’s authority to exercise discretion when reviewing the adequacy of a petition to institute, and the Director’s authority to undertake such a review in the first instance. She found that the time-bar is directed to a procedural right that prevents an agency from acting outside its statutory limits and is unrelated to the agency’s core statutory function of determining whether claims are patentable.
Judge Hughes, joined by Judges Lourie, Bryson and Dyk, dissented. The dissent found that the time-bar is closely tied to and is part of the PTAB’s institution decision, and thus argued that time-bar determinations should also be final and non-appealable.
Apportionment Must Reflect No More than Invention’s Incremental Value
The US Court of Appeals for the Federal Circuit reinforced its guidance on infringement damages, remanding in part a jury’s award for further consideration of the proper apportionment. Finjan, Inc. v. Blue Coat Systems, Inc., Case No. 16-2520 (Fed. Cir., Jan. 10, 2018) (Dyk, J).
Finjan sued Blue Coat Systems for infringing four malware identification and protection patents. A jury found that Blue Coat infringed the patents, and awarded $39.5 million in reasonable royalty damages. Blue Coat appealed.
The Federal Circuit affirmed the jury’s infringement finding for two of the three patents appealed, but concluded that Blue Coat was entitled to judgment as a matter of law of non-infringement for the third patent.
As for the damages award, Blue Coat argued that Finjan failed to appropriately apportion damages to the infringing functionality in the accused products when calculating the royalty base for the damages award for one of the asserted patents. Apportionment is required when the accused technology makes up only part of the accused product, since the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.
The Federal Circuit agreed with Blue Coat, finding that Finjan did not satisfy its burden of proving damages by a preponderance of the evidence for one of the patents. The Court found that despite establishing a royalty base from the “smallest, identifiable technical component,” Finjan missed the essential requirement that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product. The Court remanded to the district court for consideration of apportionment, whether Finjan waived the right to establish reasonable royalty damages under a new theory, and whether to order a new trial on damages as appropriate.
Re-Examination Findings Not Dispositive in District Court Proceeding
Finding that rulings on validity from re-examination proceedings are not dispositive of validity in a district court proceeding, the US Court of Appeals for the Federal Circuit vacated summary judgment of no invalidity as well as the jury’s willfulness finding and damages award. Exmark Manufacturing Company, Inc. v. Briggs & Stratton Power Products Group, LLC, Case No. 16-2197 (Fed. Cir., Jan. 12, 2018) (Stoll, J). The Court found that the higher “clear and convincing” standard of proof in district court does not preclude the district court from reaching a different conclusion on validity than that reached during a re-examination proceeding.
Exmark sued Briggs for infringement of a patent directed to a lawn mower having improved flow control baffles. Three separate re-examinations confirmed patentability of Exmark’s patent. The district court granted summary judgment that the claim was not invalid, relying solely on the fact that the claim had survived multiple re-examinations. Following a jury award of damages for willful infringement, the district court denied Briggs’ motion for a new trial on damages. Briggs appealed.
On appeal, the Federal Circuit vacated the district court’s summary judgment of no invalidity. While the district court stated it had given the re-examinations “some, though not determinative, weight,” the Federal Circuit disagreed, finding that the district court opinion was conclusory and offered no other explanation for its determination. The Court found that the district court had improperly deferred to the re-examination findings and neglected its obligation to reach an independent conclusion, noting that the district court was required to independently assess validity in view of the higher “clear and convincing” standard of proof in district court.
The Federal Circuit also vacated the jury’s damages award. While the Court agreed that it was permissible to apportion damages through the royalty rate instead of the royalty base, it found that Exmark’s expert failed to adequately tie the proposed royalty rate of 5 percent to the facts of the case. The expert considered the Georgia-Pacific factors but failed to explain the extent to which those factors affected the royalty calculation. The Court also found that the expert’s analysis ignored the value added by other patented components as well as non-patented elements, such as durability, reliability and branding. The Court remanded to the district court for new determinations of invalidity and damages, including, if necessary, a new trial on damages.
Extrinsic Evidence Can Be Used to Support Inherent Anticipation
The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) finding that the challenged claims were anticipated and obvious. Monsanto Tech. LLC v. E.I. DuPont de Nemours & Co., Case No. 17-1032 (Fed. Cir., Jan. 5, 2018) (Wallach, J). Regarding the anticipation finding, the Court found that the PTAB properly considered declarations by inventors of a prior art patent.
Monsanto owns a patent related to a step process for mating two parent soybean lines to produce soybean seeds with a modified fatty acid profile. DuPont sought inter partes re-examination of several claims of the patent. During re-examination, DuPont submitted two declarations from a named inventor of the primary prior art reference. The PTAB found the claims anticipated by and obvious over the prior art reference, in part by relying on the declarations. Monsanto appealed.
Monsanto argued that the PTAB erred by (1) misconstruing the claim element “about 3 percent or less” linolenic acid content to include a content of 4 percent, (2) rejecting the claims for anticipation and (3) using a legally erroneous obviousness theory.
The Federal Circuit found that the PTAB properly construed the “about 3 percent or less” claim element. Finding that the claim language was not instructive, the Court turned to the specification and found that a disclosed example contained a range of linolenic acid content from 2.3 percent to 4.1 percent. Based on this disclosure, the Court concluded that a person of ordinary skill in the art would reasonably consider “about 3 percent or less” to encompass a range that includes 4 percent.
As to anticipation, Monsanto argued that the prior art reference did not anticipate Monsanto’s claims because it failed to explicitly identify plant progeny with characteristics required by the claims’ limitations and because the PTAB relied on the inventor’s declarations as prior art. The Federal Circuit disagreed, explaining that the prior art reference inherently anticipated the challenged claims notwithstanding that it reported only a select subset of progeny lines, because its disclosure necessarily included progeny that fell within the scope of the claims. As to the PTAB’s reliance on the declarations, the Court found that extrinsic evidence may be used to support what is “necessarily present” in a prior art reference. The Court found that the declarations demonstrated what was inherent in the teachings of the prior art reference, rather than expanding the meaning of the prior art reference or serving as prior art themselves. Thus, the Court held the PTAB properly relied on the inventor’s declarations.
Finally, the Federal Circuit affirmed the PTAB’s finding of obviousness, agreeing with the PTAB that a person of ordinary skill in the art would have been motivated to modify the prior art reference to produce progeny having fatty acid profiles as claimed in the patent.
Concrete Solution to Computer Problem Is Patent Eligible
Affirming a series of district court rulings, the US Court of Appeals for the Federal Circuit found claims directed to software menus that display a limited subset of commonly used functions—useful in conserving space on small screens—to be patent eligible. Core Wireless Licensing v. LG Electronics, Inc., Case No. 16-2684 (Fed. Cir., Jan. 25, 2018) (Moore, J). The Court also affirmed the district court’s denial of the defendant’s motion for judgment as a matter of law (JMOL) on anticipation, despite the fact that the plaintiff put forward no rebuttal witness on validity.
Core Wireless owns patents directed to software menus useful with applications running on small screens; i.e. menus that display a limited subset of potential functions. These menus allow users to navigate to and access the most commonly used functions without needing to key through a large menu on a small screen. Core Wireless sued LG for infringement of these patents.
LG moved for summary judgment of invalidity, arguing that the patents were ineligible for protection under § 101 because they were directed to the abstract idea of indices. The district court denied summary judgment. After trial, LG also moved for JMOL on anticipation, arguing that a prior art reference taught the use of a small menu to save space on a small screen. LG argued that Core Wireless had not put forward any expert on validity, so there was no evidence on which a reasonable jury could have relied to find that the patents were not anticipated. The district court disagreed and denied the JMOL. LG appealed.
The Federal Circuit affirmed. Addressing the § 101 issue, the Court found that rather than merely reciting indices, the patents claimed a concrete solution to a problem specific to computers, which was lack of screen size and resulting navigational difficulties. The Court analogized these patents to others that offered seemingly abstract solutions to novel issues created by computers that the Court had previously held to be patent eligible.
Turning to the JMOL, the Court noted that not only does the defendant bear the burden of proving anticipation, but it also must do so by means of clear and convincing evidence. The Court explained that JMOL should be granted in only the most extreme cases, such as where an opposing party’s witness makes a key admission. Here, Core Wireless was not required to put forward any affirmative evidence of validity. Instead, Core Wireless properly relied on cross examination of LG’s witness to impeach testimony, including an admission that the prior art reference only taught a list that allowed a user to access every function of the software, rather than the limited list taught by the asserted patents. Thus, the Court found that the jury was entitled not to credit LG’s witness and that LG had not properly carried its burden of proof.
Facts? What Facts? Seems No Factual Basis Required for § 101 Rejections
The Patent Trial and Appeal Board (PTAB) affirmed an examiner’s rejection under 35 USC § 101 of claims directed to “managing customer discounts following the receiving of a cancellation request by a customer,” finding that the rejection was appropriate even though the examiner did not provide factual evidence to support his finding that the claims were directed to an abstract idea. Ex Parte Bradley Johnson et al., Appeal No. 2016-004623 (PTAB, Jan. 18, 2018) (Medlock, APJ).
The application at issue relates to a system and method for customer discount management. The US Patent and Trademark Office (PTO) examiner found the pending claims directed to “a fundamental economic practice and, therefore, to an abstract idea.” The claims were therefore rejected under § 101. Applicants appealed.
The PTAB, after explaining that there was “no controlling authority that requires the Office to provide factual evidence to support a finding that a claim is directed to an abstract idea,” dismissed applicants’ argument that the rejection could not be sustained because the examiner did not present evidence supporting his conclusion that the claims were directed to an abstract idea.
The PTAB further explained that the US Court of Appeals for the Federal Circuit has “repeatedly” noted that “the prima facie case is merely a procedural device that enables an appropriate shift of the burden of production,” refuting the appellants’ suggestion that the PTAB had previously held that such requirement existed. The PTAB further concluded that all that is required of the examiner is to sufficiently articulate the reasons for rejection in an informative manner that satisfies the notice requirements of 35 USC § 132.
Practice Note: Practitioners should note the possible impact of this decision on the examiner guidance issued by the PTO in 2016 regarding how to formulate a subject matter eligibility rejection (IP Update, Vol. 19, No. 5). The guidance requires office actions to provide an explanation as to why each patent claim is unpatentable.
PTAB Analysis Must Include Result of Prior IPR in Ruling on Dependent Claims
Addressing the issue of collateral estoppel in inter partes review (IPR), the US Court of Appeals for the Federal Circuit vacated a finding of patentability by the Patent Trial and Appeal Board (PTAB) in view of the result of other IPRs and appeals of the challenged patent. MaxLinear, Inc. v. CF Crespe LLC, Case No. 17-1039 (Fed. Cir., Jan. 25, 2018) (Dyk, J).
CF Crespe owns a patent related to a broadband television signal receiver for receiving multi-standard analog television signals, digital television signals and data channels. MaxLinear challenged the patent in an IPR, arguing that the claims were invalid as obvious in view of a combination of prior art references. Ultimately, the PTAB concluded that the claims were patentable. In its final written decision, the PTAB relied entirely on its analysis of the independent claims and did not provide any separate analysis or discussion for the patentability of the dependent claims. MaxLinear appealed.
Separately, the same patent was the subject of two other IPRs. In those IPRs, a different petitioner challenged certain claims based on different combinations of prior art references. The PTAB concluded that the independent claims, as well as some of the dependent claims, were unpatentable over the cited prior art. Those decisions were previously appealed, and the Federal Circuit affirmed the PTAB’s decisions of unpatentability. However, some of the dependent claims at issue in the IPR filed by MaxLinear were not addressed in the prior IPRs and thus were never held to be unpatentable.
On appeal, the parties agreed that the decisions in prior IPRs, having been affirmed by the Federal Circuit, were binding in the current appeal filed by MaxLinear as a matter of collateral estoppel. Thus, the conclusion of patentability in those cases applied to the claims that were being considered in the instant appeal. However, because certain dependent claims were not addressed in the prior IPRs, and the PTAB did not separately analyze those dependent claims in the IPR filed by MaxLinear, there had been no finding as to whether those dependent claims were separately patentable. As a result, the Court vacated the PTAB’s decision, remanded the case to the PTAB, and provided instructions to consider the patentability of the dependent claims that were not considered in the prior IPRs.
Don’t Count on Employment Agreement Promise of Assignment for Standing
Addressing whether a patent owner with incomplete ownership interest had standing to sue, the US Court of Appeals for the Federal Circuit upheld a district court’s decision, finding that the plaintiff did not have full ownership of the asserted patent by virtue of an inventor’s employment agreement with the patent owner’s transferee. Advanced Video Technologies LLC v. HTC Corp., et al., Case Nos. 16-2309; -2310; -2311 (Fed. Cir., Jan. 11, 2018) (Reyna J) (O’Malley, J, concurring) (Newman, J, dissenting).
Advanced Video sued HTC on a patent relating to a full duplex single chip video codec. Advanced Video obtained ownership of the patent through a series of title transfers that originated from Infochips Systems. Of the three inventors listed on the patent and employed by Infochips, one (Hsiun) refused to assign her ownership interest in the invention despite being required to under her employment agreement. HTC moved to dismiss the case for lack of standing because Hsiun was not a party to the suit.
Advanced Video argued that Hsiun’s employment agreement transferred ownership rights to Infochips and subsequently to Advanced Video. The employment agreement at issue contained three relevant provisions:
- A “will assign” provision
- A “trust” provision
- A “quitclaim” provision
Under the “will assign” and “trust” provisions, Hsiun agreed to make a full written disclosure that Infochips would hold in trust, and further agreed that she would assign, all rights to any and all inventions. Under the “quitclaim” provision, Hsiun agreed to waive all claims she had or may have relating to infringement of the patent. The district court dismissed the case, finding that these provisions did not create a transfer of Hsiun’s ownership rights and that Advanced Video lacked standing because Hsiun was not a party to the suit. Advanced Video appealed.
On appeal, the Federal Circuit found that the “will assign” provision did not create an immediate assignment of rights in the invention to Infochips. The Court agreed with the district court that the word “will” in the provision invokes a promise to do something in the future and does not create a present assignment. Advanced Video argued that even if ownership rights were not assigned, Hsiun was a trustee, and her interests in the invention were immediately placed in trust for the benefit of Infochips and subsequently Advanced Video. The Federal Circuit disagreed, finding that for purposes of standing, Infochips did not have any ownership rights since no ownership interests were ever actually transferred out of trust. As to the quitclaim provision, the Federal Circuit found that it only applied to “rights resulting from any applications actually assigned,” and because no patent rights were ever assigned to Infochips, the quitclaim provision did not apply.
The Federal Circuit ultimately concluded that Advanced Video did not have full ownership of the asserted patent and had no standing to maintain its suit. The Court suggested that to gain standing, Advanced Video must seek to enforce its alleged ownership rights against Hsiun.
Practice Note: Careful attention should be paid to the verb tense used in assignment provisions, and to whether an employee has actually made an assignment or whether the employee agrees that he or she will make the assignment.
Non-Defendant IPR Petitioners’ Appellate Standing on Shaky Ground
In dismissing an appeal from a Patent Trial and Appeal Board (PTAB) decision, the US Court of Appeals for the Federal Circuit explained that the non-defendant inter partes review (IPR) petitioner did not have Article III standing to appeal because the petitioner was not accused of infringement. RPX Corporation v. ChanBond LLC, Case No. 17-2346 (Fed. Cir., Jan 17, 2018) (Linn, J) (non-precedential).
RPX, a San Francisco-based infringement defense and patent aggregation member organization, challenged the patentability of a patent owned by ChanBond via an IPR proceeding. Under its “Patent Quality Initiative,” RPX regularly challenges “weak” patents with a relatively high success rate. Although ChanBond had asserted the patent in federal court against other entities, ChanBond did not accuse RPX of infringement. In its final written decision, the PTAB determined that RPX did not show the claims of the patent to be unpatentable. After RPX appealed, ChanBond filed a motion to dismiss, arguing that RPX lacked appellate standing because ChanBond had not accused RPX of infringement.
RPX argued that it had suffered three types of injury sufficient to establish appellate standing:
- Injury to RPX’s statutory right to file multiple IPR petitions on the same patent claims
- Injury to RPX’s market standing relative to competitors
- Injury to RPX’s reputation within the industry of successfully challenging issued patents
The Federal Circuit rejected all three of these arguments. First, with regard to the injury in fact requirement, the Federal Circuit cited its 2014 decision in Consumer Watchdog v. Wisconsin Alumni Research Foundation (IP Update, Vol. 17, No. 7) and its 2017 decision in Phigenix, Inc. v. Immunogen, Inc. (IP Update, Vol. 20, No. 2). The Court concluded that although RPX was entitled to file multiple petitions on the same patent, that was not sufficient to establish appellate standing “when the appellant is not engaged in any activity that would give rise to an infringement suit.” As the Court noted, RPX “was permitted to request [review] and participate once the PTO granted its request. That is all the statute requires.”
Next, the Court addressed RPX’s competition-based injury argument. The Court concluded that although competition-based injury is sufficient to establish appellate standing under the doctrine of competitor standing, RPX did not submit sufficient evidence to demonstrate that the PTAB’s decision “increased or [aided] the competition in the market of the non-defendant IPR petitioners.” Finally, regarding RPX’s injury to industry reputation argument, the Court determined that the evidence submitted by RPX on appeal did not sufficiently “demonstrate a concrete and particularized reputational injury.” Thus, because RPX could not demonstrate that it had suffered an injury in fact, the Court held that RPX lacked Article III standing to appeal the PTAB’s decision affirming the patentability of ChanBond’s patented claims.
Disclaiming Yourself into an Adverse Judgment
The US Court of Appeals for the Federal Circuit agreed with the Patent Trial and Appeal Board (PTAB) that because a patent owner disclaimed all claims challenged in an inter partes review (IPR) prior to institution, the IPR petitioner was entitled to an adverse judgment. Arthrex, Inc. v. Smith & Nephew, Inc., Case No. 17-1239 (Fed. Cir., Jan. 24, 2018) (Dyk, J) (O’Malley, J, concurring) (Newman, J, dissenting).
After a petition for IPR was filed against a patent owned by Arthrex, Arthrex disclaimed all claims that were the subject of the petition. The disclaimer occurred before the PTAB issued an institution decision. The PTAB then entered an adverse judgment citing 37 CFR § 42.73(b). Arthrex appealed.
The Federal Circuit panel majority agreed that the PTAB acted within the scope of the regulation. While the rule defines “trial” as requiring “a contested case instituted by the Board based upon a petition,” the Federal Circuit explained that the language relating to remaining claims “in the trial” can be interpreted as meaning that there is no claim remaining for trial, which occurs when, as here, all of the challenged claims have been cancelled.
The Court further explained that the rule’s purpose is to define the circumstances in which the estoppel provision applies, and that the purpose of the estoppel provision is to “provide[ ] estoppel against claims that are patentably indistinct from those claims that were lost.” The panel thus concluded that there was “no meaningful distinction between claims that are cancelled before an IPR proceeding is instituted and claims that are cancelled after an IPR proceeding is instituted.”
The panel considered the various subsections of § 42.73(b), explaining that the rule should be applied consistently over the various subparts. Subsection 1 states that “[d]isclaimer of the involved application or patent” will be construed as a request for an adverse judgment, and the panel explained that “this subsection on its face seems to apply at any time during the proceeding. We see no reason why estoppel should apply if a patent owner disclaims an entire patent or application before an institution decision but should not apply if a patent owner merely disclaims some of the claims.” The panel noted that subsection 3 “similarly contains no time limitation” and that according to this subsection, “a ‘[c]oncession of unpatentability or derivation of the contested subject matter’ will be construed as an adverse judgment.”
In her concurrence, Judge O’Malley agreed with Judge Dyk that the Federal Circuit had jurisdiction to review the PTAB’s adverse judgment against Arthrex, and that the PTAB’s interpretation of § 42.73(b) was consistent with the text of that regulation. O’Malley expressed doubt, however, “about whether the Director had the authority under 35 U.S.C. § 316 (or any other statutory provision) to issue that regulation [§ 42.73(b),] or whether, if so, the regulation was properly promulgated.”
In dissent, Judge Newman expressed the view that the IPR was not “instituted” because the patentee disclaimed all of the challenged claims before the PTAB decided whether to institute. In her view, no IPR could be instituted because no challenged claims remained in the patent. Newman found the adverse judgment improper since, according to the majority, it “subjects Arthrex to the estoppel provisions of 37 C.F.R. § 42.73(d)(3) . . . as if there had been an IPR trial and Arthrex had lost on the merits.”
Self-Help CIP Doesn’t Give Rise to § 121 Safe Harbor
Addressing whether patent holders can use the 35 USC § 121 safe harbor on a self-help basis to avoid obviousness-type double patenting, the US Court of Appeals for the Federal Circuit upheld a Patent Trial and Appeal Board (PTAB) rejection based on such double patenting. In re: Janssen Biotech, Inc., Case No. 17-1257 (Fed. Cir., Jan. 23, 2018) (Prost, CJ). The panel concluded that once a patent issues on a continuation-in-part (CIP), rather than as a divisional, with claims to subject matter outside the scope of a restriction requirement, there is no safe harbor refuge from double patenting.
Janssen filed a CIP claiming priority to an application that ultimately matured into a patent. Both the CIP and the issued patent disclosed and claimed priority through a series of applications directed to antibodies specific to human tumor necrosis factor alpha and a later application directed to immunoreceptor molecules specific for tumor necrosis factor alpha or beta. All told, more than 30 patents reached through the original priority application for the benefit of an earlier filing date.
In 2013, in response to a third-party request, the US Patent and Trademark Office re-examined the issued patent on double patenting grounds over three patents. During the re-examination, Janssen cancelled two claims and requested that the issued patent be amended to delete the benefit claims to the earlier application directed only to tumor necrosis factor alpha. Janssen also amended the specification, abstract and drawings to conform to the later application, thereby deleting the portions relating only to the alpha factor. Lastly, Janssen requested that the application for the issued patent be designated as a divisional of the later application (directed to tumor necrosis factor alpha or beta), rather than as a CIP. The examiner and the PTAB maintained the double patenting rejections on the basis that the § 121 safe harbor did not apply. Janssen appealed.
On appeal, the Federal Circuit considered “whether, several years after a challenged patent issues on a CIP application, a patent owner can retroactively bring the challenged patent within the scope of the § 121 safe harbor by amending the CIP application during a reexamination proceeding to predesignate it as a divisional application.”
The Federal Circuit applied a strict application of § 121, noting that in accordance with its literal terms, the safe harbor protects only divisional applications (or the original application) and patents “issu[ed] on” such applications. Therefore, patents issued on CIP applications are not within the scope of the safe harbor. The Court cited in support G.D. Searle v. Lupin Pharma. (IP Update, Vol. 18, No. 7), which held that “the patent owner should not take advantage of the safe-harbor provision simply by designating the CIP as a divisional application in a reissue application years after the fact.” The Court reasoned that the application on which the challenged patent had issued was not a divisional because it contained new matter that was not in the original application, nor could the application be retroactively altered by simply deleting new matter, and the patent owner could not for purposes of § 121 retroactively relinquish the new matter in the CIP after enjoying years of patent protection.
Applying the reasoning in Searle, the Court concluded that “a patent owner cannot retroactively bring its challenged patent within the scope of the safe-harbor provision by amendment in a reexamination proceeding.”
Walker Process Claims Don’t Belong in the Federal Circuit
In the continuing tug-of-war between antitrust and intellectual property, the US Court of Appeals for the Federal Circuit transferred a Walker Process claim to the Fifth Circuit for lack of appellate jurisdiction. Xitronix Corp. v. KLA-Tencor Corp., Case No. 16-2746 (Fed. Cir., Feb. 9, 2018) (Moore, J).
In Walker Process, the Supreme Court of the United States held that a patent holder may be subject to antitrust liability in a situation where the patent was obtained by knowing and willful fraud on the patent office, and where all the other necessary elements for a Sherman Act charge are present.
Here, Xitronix brought a Walker Process claim alleging that KLA fraudulently obtained a patent. Although both parties agreed that the Federal Circuit had jurisdiction over the claim on appeal, the Federal Circuit was not so certain. After oral argument, the Court specifically asked for supplemental briefing relating to its holding in Gunn v. Minton (IP Update, Vol. 16, No. 2) to determine whether appellate jurisdiction in the Federal Circuit was proper. In Gunn, the Federal Circuit ruled that although it has exclusive jurisdiction over patent issues, other courts may hear patent-related claims, such as malpractice claims relating to patent prosecution.
Citing Gunn, the Federal Circuit held that although this case would potentially involve “analysis of the [patent] claims and specifications and may require application of patent claim construction principles,” the federal question jurisdiction statute required more than “mere resolution of a patent issue.” The Court went on to note 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,” and that “[p]atent claims will not be invalidated or revived based on the result of this case.” Instead, “patent law is only relevant to determine if KLA intentionally made misrepresentations.”
Thus, finding no “substantial” issue of patent law, the Federal Circuit transferred the case to the Fifth Circuit to determine whether the patent was procured through intentional fraud in order to illegally create or preserve a monopoly.
Practice Note: Gunn v. Minton narrowed the appellate jurisdiction of the Federal Circuit. Tangential resolution of a patent dispute is not necessarily enough to invoke Federal Circuit jurisdiction. Going forward, Walker Process claims will not be heard in the Federal Circuit merely because they require some consideration of a patent issue.
A Matter of Form: Pay Attention to Custom Verdict Instructions
Addressing whether a defendant waived submission of its invalidity counterclaims to a jury by failing to object to the verdict form submitting invalidity as an affirmative defense, the US Court of Appeals for the Federal Circuit affirmed the district court’s refusal to enter judgment of invalidity and its dismissal of invalidity counterclaims without prejudice. Flexuspine, Inc. v. Globus Med., Inc., Case Nos. 17-1188; -1189 (Fed. Cir., Jan. 19, 2018) (Prost, CJ).
Flexuspine filed a complaint alleging that Globus infringed five patents. Globus in turn asserted invalidity counterclaims for each patent and requested a jury trial on its counterclaims. As a result of inter partes review proceedings and summary judgment motions, only two patents remained for trial. Both parties submitted proposed special verdict forms. Flexuspine’s included a “stop instruction,” which instructed the jury that if it answered negatively on infringement, it should stop and not answer the questions on invalidity and damages. Globus’s proposed verdict form did not include the stop instruction.
At the charge conference, the district court adopted Flexuspine’s proposed special verdict form including a “stop instruction.” Globus did not object. After deliberating, the jury returned a verdict, answering “no” to all questions regarding infringement. But the jury did not stop, instead answering questions finding the claims invalid and awarding $0 in damages. The district court instructed the jury to deliberate again with a new (blank) verdict form and to follow the written instructions on the verdict form. Thereafter, the jury returned a verdict finding the claims not infringed but left the remaining questions unanswered. At this point, Globus lodged a formal objection.
The district court entered final judgment of non-infringement but did not address invalidity in its judgment. Globus filed motions under Rule 59(e) requesting the judgment be amended to include the jury’s invalidity verdict, and under Rule 50(b) requesting judgment as a matter of law on invalidity. The district court denied Globus’s Rule 59(e) motion and dismissed its invalidity counterclaims without prejudice. Globus appealed.
The Federal Circuit affirmed. The Court rejected Globus’s argument that the district court’s judgment must be amended under Rule 59(e) to reflect the jury’s finding of invalidity on the first verdict form. The Court explained that the jury, in ignoring the “stop instruction,” rendered an internally inconsistent verdict, which the district court had discretion to resubmit to the jury for further consideration. The Federal Circuit also found that the district court properly found from Globus’s lack of objection to the verdict form that “Globus submitted the issue of invalidity to the jury only as an affirmative defense, not as a counterclaim.”
Finally, the Federal Circuit affirmed the district court’s decision to dismiss as moot Globus’s invalidity counterclaims without prejudice and to deny its Rule 50(b) motion for judgment as a matter of law on invalidity. The Court explained that the district court had in effect concluded that the invalidity counterclaims were not before the jury by resubmitting the special verdict form, and therefore Globus waived its right to try the invalidity counterclaims in the case. The Court found that the district court was within its discretion in dismissing the invalidity counterclaims without prejudice under those circumstances.
Practice Note: This case underscores the importance of crafting a special verdict form tailored to the issues in the case before the verdict form goes to the jury. Failure to object to the verdict form and to alert the district court to its inadequacy can result in a party waiving its right to submit a counterclaim to the jury.
Defense Counsel Narrowly Avoids Sanctions for Re-Litigating Decided Issues
The US Court of Appeals for the First Circuit “reluctantly” declined to impose sanctions in a “very close case” against defense counsel in a six-year litigation involving indemnification for patent infringement claims. AngioDynamics, Inc. v. Biolitec AG, Case No. 17-1239 (1st Cir., Jan. 23, 2018) (per curiam).
AngioDynamics moved for sanctions against defendants and defense counsel after the First Circuit disposed of the defendants’ fifth appeal in the ongoing litigation. Under Rule 38 of the Federal Rules of Civil Procedure, after determination that an appeal is frivolous, an appellee may be awarded “just damages and single or double costs” upon motion from appellee. A frivolous appeal is one “wholly without merit.” In addition, it is appropriate to sanction a lawyer personally for excess costs where an appeal results in “vexatious advocacy” needlessly multiplying the proceedings.
The First Circuit noted that this case presented several hallmarks of frivolity. The defendants’ latest appeal largely relied on arguments that the defendants had waived in their prior appeal, according to the Court. The Court also found that defendants reused portions of their prior briefing on the waived issue. The Court noted that in other previous cases, it had imposed sanctions where counsel repeated prior arguments or copied portions of prior briefing verbatim.
After oral argument, defense counsel submitted a letter explaining that they had reasonably misinterpreted the Court’s prior decision and thus the appeal was not frivolous. The Court disagreed, concluding that defendants’ tactics “reeked of an attempt at re-litigation.” Nevertheless, the Court gave defendants the benefit of the doubt that but for the misinterpretation of the Court’s prior decision, counsel would not have filed the current appeal. Before denying the motion for sanctions, the Court advised defendants that neither the district court nor the appellate court would be “charitable” in future attempts to prolong the case.
America Invents Act
Getting to the Right Cite
The Patent Trial and Appeal Board (PTAB) granted a petitioner’s motion to dismiss its original petition, allowing the petitioner to terminate an inter partes review (IPR) proceeding and file a new petition where the petitioner originally had cited a patent that was not prior art, but had a corresponding pre-grant publication that was. Wavetamer Gyros, LLC v. Seakeeper Inc., Case No. IPR2017-01931 (PTAB, Jan. 9, 2018) (Paper 13) (Green, APJ).
Wavetamer filed two petitions to provoke IPR of two patents owned by Seakeeper. In each petition, Wavetamer cited a patent (Adams) (which, incidentally was also owned by Seakeeper) rather than the pre-grant publication (Adams PGPUB). While Adams PGPUB is prior art to both the challenged patents, Adams is not. Wavetamer moved to dismiss the original petitions and sought authorization to file amended petitions. In its motions, Wavetamer explained that its incorrect citation was an inadvertent technical mistake that would severely prejudice Wavetamer because of estoppel provisions, and argued that it deserved to have its case heard on merits.
Wavetamer further explained that Adams and Adams PGPUB had identical texts, and given that Adams is owned by Seakeeper, Seakeeper was aware that Adams PGPUB would have been prior art and that the requested termination and authorization to re-file corrected petitions would not affect the merits of Wavetamer’s invalidity arguments. Wavetamer also argued that General Plastic factors (General Plastic Industrial Co., Ltd. v. Canon Kabushiki Kaisha, Case No. IPR2016-01357 (PTAB, Sept. 6, 2017) (Paper 16) (precedential)), weighed in favor of allowing institution of IPR for its corrected petition.
The PTAB granted the request to terminate, because doing so “at this stage increases the efficiency of the Board and the parties.” The PTAB declined to consider the General Plastic factors, however, noting that those factors are to be considered in evaluating follow-on petitions, and that it would be premature to rule on institution of IPR review based on the corrected petitions until those petitions are filed.
Practice Note: Petitioners should be cautious when multiple versions of the same text exist as publications. Petitioners would be well served to file all documents well in advance of the § 315(b) deadline, in case there is a need to self-terminate and re-file.
PTAB Designates § 315(b) Opinions as Informative IPR Precedent
On the heels of the US Court of Appeals for the Federal Circuit’s en banc opinion in Wi-Fi One, LLC v. Broadcom Corp. holding that § 315(b) time-bar determinations are appealable (IP Update, current issue), the Patent Trial and Appeal Board (PTAB) designated two of its earlier § 315(b) decisions as informative precedent. Luv’n Care, Ltd. v. McGinley, Case No. IPR2017-01216 (PTAB, Sept. 18, 2017) (Browne, APJ); Amneal Pharmaceuticals, LLC v. Endo Pharmaceuticals Inc., Case No. IPR2014-00360 (PTAB, June 27, 2014) (Bonilla, APJ). In light of this designation, scrutiny of service timing and satisfaction of fee-payment requirements will continue to be central to § 315(b) time-bar analysis for inter partes review (IPR).
The issue in Luv’n Care, Ltd., concerned the impact of failure to pay the required petition fees due to insufficient funds in the deposit account used. The petitioner filed its IPR petition against the challenged patent on March 20, 2017, but the US Patent and Trademark Office (PTO) did not receive payment on that date. After discovering that the PTO had not received payment of the required fees, the petitioner filed a second petition on April 11, 2017, and was accorded a filing date for that later petition. The petitioner then filed a motion to have the later petition accorded the filing date of the earlier petition. The earlier filing date was necessary for the petitioner to safely file its IPR petition within the § 315(b) one-year period of being served with the patent owner’s district court complaint alleging infringement of the challenged patent.
The PTAB denied institution of the earlier-filed petition, citing 35 USC § 312(a)(1) and observing that an IPR petition “may be considered only if the petition is accompanied by payment established by the Director under section 311.” The PTAB noted its earlier precedent explaining that § 312(a) was not jurisdictional and that petition defects under that section could be cured in some circumstances. But the PTAB found, with analysis, that it would not waive the fee requirement in this case.
In Amneal Pharmaceuticals, LLC, the issue was whether the “served with a complaint” provision under § 315(b) was implicated by the patent owner’s service of a motion to amend its district court complaint, which included a proposed second amended complaint alleging infringement of the challenged patent. The patent owner filed an initial complaint against the petitioner on November 7, 2012, and filed a first amended complaint one week later. On December 11, 2012, the challenged patent issued. The patent owner then filed a motion to amend the complaint on January 9, 2013, including a copy of its proposed second amended complaint in which it alleged infringement of the challenged patent for the first time. Those documents were served on the petitioner via the district court’s notice of electronic filing. The district court granted the patent owner’s motion on January 14, 2013. The patent owner then filed its second amended complaint on January 17, 2013. The petitioner filed its IPR petition against the challenged patent on January 16, 2014. In its preliminary response, the patent owner argued that the petition was time-barred under § 315(b).
The PTAB concluded that the date the patent owner served the petitioner with its motion to file its second amended complaint, January 9, 2013, did not start the § 315(b) time clock. According to the PTAB, the motion was simply a request to file the proposed second amended complaint, and at that time the petitioner was not yet a defendant in a lawsuit with respect the challenged patent. As a result, the petition was filed within the one-year period after the petitioner was served with the second amended complaint.
Former Band Member Must Sail On Down the Line
The US Court of Appeals for the 11th Circuit upheld a permanent injunction precluding a musician from using the trademarks of his former band. Commodores Entertainment Corp. v. Thomas McClary, Case No. 16-15794 (11th Cir., Jan. 9, 2018) (Marcus, J). The Court further found that because the band members only owned the band’s trademarks jointly, the trademark registration was not defective and the injunction was not overbroad.
This action began following two email blast advertisements by Thomas McClary, former member of the Commodores, a Grammy-Award-winning rhythm and blues, funk and soul band. The advertisements promoted McClary’s new band with the phrase “‘COMMODORES’ founder Thomas McClary.” In August 2014, the Commodores Entertainment Corporation (CEC), run by two original Commodores members who remain active with the band, sued for trademark infringement, false advertisement and trademark dilution, seeking damages and an injunction.
McClary was an original member of the Commodores but “split from the band” in 1984 to strike out on his own. He later formed a musical group that performed as “The 2014 Commodores” and “The Commodores Featuring Thomas McClary.”
The district court granted CEC a preliminary injunction and enjoined McClary from using the marks. A panel of the 11th Circuit affirmed. After a full trial, the district court granted judgment as a matter of law to CEC and converted the preliminary injunction into a permanent one. McClary appealed the injunction order and the district court’s oral ruling denying his motion to dismiss for failure to join an indispensable party.
Before addressing the injunction, the 11th Circuit addressed whether it had jurisdiction to review the denial of McClary’s motion to dismiss for failure to join an indispensable party. The Court concluded that denials of motions to dismiss are not final orders reviewable on appeal, and declined to exercise pendant jurisdiction since resolution of the issues relating to the injunction did not depend on resolution of the motion to dismiss.
The 11th Circuit affirmed the permanent injunction order, concluding that McClary had no rights to “The Commodores” trademark because he left the group more than 30 years ago and abandoned his rights to the trademark once he departed from the group. The group, not the individual members, maintained joint ownership of the band’s marks. In accordance with the band members’ contracts with CEC, band members retained zero trademark ownership after departing from the band. McClary’s lack of control over the group and its business decisions also supported the determination that McClary’s trademark rights were extinguished when he left the group.
The Court found that the injunction was not overly broad since it does not preclude McClary from holding himself out as a former member and founder of the Commodores. The only limitations in the injunction were the prohibitions on McClary using the names “The 2014 Commodores” or “The Commodores featuring Thomas McClary,” because such names are likely to cause confusion with the current members of the CEC. The Court also found the extraterritorial reach of the permanent injunction not to be overly broad because the foreign infringing activity was likely to have a substantial effect in the United States, and exercising jurisdiction would not affect the rights of other sovereign nations.
Knurling – Design Element or Technological Advancement?
The US Court of Appeals for the Sixth Circuit concluded that a knurling pattern on a rifle scope can be an ornamental design and vacated the district court’s grant of a summary judgment. Leapers, Inc. v. SMTS, LLC, et al., Case No. 17-1007 (6th Cir., Jan. 10, 2018) (Clay, J).
Leapers makes adjustable rifle scopes that are textured with so-called “knurling,” which allows users to grip the products more easily and make fine-tuning scope adjustments. Knurling can be found on a wide variety of everyday items, such as door handles, coin edges and bottle lids. Leapers asserted that its unique knurling pattern was distinctly “ornamental” and that consumers recognize Leapers as the source of the product because of the knurling pattern.
Leapers entered into an exclusive manufacturing contract with a factory in China. The factory agreed not to disclose any information regarding Leapers’ products. Leapers later ended its relationship with the factory, and the factory representatives agreed to stop using technical specifications, product design and packaging design documents relating to the knurling, and to destroy any of the products produced. However, the manager of the factory formed a company called Trarms through which he began selling rifle scopes. He also began manufacturing rifle scopes for other sellers, including Sun Optics USA and SMTS.
Leapers sued, alleging trade dress infringement of the knurling design and arguing that certain characteristics and decorations of its products make the source of the product distinguishable from other products and promote its sales. The district court granted defendants summary judgment—even though the factory manager refused to testify by asserting the Fifth Amendment—holding that Leapers could not prove non-functionality and secondary meaning.
In order to prevail on a claim for trade dress infringement based on a product’s design, a plaintiff must show that its design (1) is non-functional, (2) has acquired a secondary meaning and (3) is confusingly similar to the allegedly infringing design. Furthermore, in Celotex v. Catrett (1986) the Supreme Court of the United States cautioned against misuse or overextension of trade dress, explaining that “product design almost invariably serves purposes other than source identification” and that summary judgment will be granted if the plaintiff “fails to present sufficient evidence for a reasonable jury to find in its favor on any one of the three elements.”
On appeal, the Sixth Circuit reversed the summary judgment, concluding that “a jury could reasonably find that Plaintiff’s design is nonfunctional because Plaintiff’s design is purely ornamental,” and that the design therefore does not represent a technological advancement that would put competitors at a significant disadvantage.
Ninth Circuit Dishes Out Food for Thought on Summary Judgment
Addressing the affirmative defenses of laches and acquiescence in the context of a supplier’s use of another party’s registered mark on food products, the US Court of Appeals for the Ninth Circuit vacated a district court’s grant of summary judgment and remanded for further proceedings. Eat Right Foods Ltd. v. Whole Foods Market, Inc. et al., Case No. 15-35524 (9th Cir., Jan. 29, 2018) (Tallman, J).
Eat Rights Food (ERF) has used the mark EATRIGHT on organic foods since at least 2001. In early 2010, Whole Foods debuted a nutritional scoring system patented by Nutritional Excellence, LLC, and promoted Nutritional Excellence’s “EatRight America” diet. Later in 2010, the managing director of ERF observed the EATRIGHT AMERICA mark being displayed in Whole Foods stores. Soon afterward, she emailed Whole Foods stating that it was “fantastic to see” Whole Foods’ partnership with Nutritional Excellence and inquired whether Whole Foods would be interested in buying ERF’s EATRIGHT brand.
In early 2011, ERF’s managing director observed the EATRIGHT AMERICA mark on several food products in Whole Foods stores. She did not contact Whole Foods until September 2011, when she claimed that Whole Foods was infringing ERF’s EATRIGHT trademarks. When Whole Foods responded that ERF needed to take up this issue with Nutritional Excellence, ERF again asked if Whole Foods would be interested in purchasing ERF’s EATRIGHT brand. Whole Foods stated that it would “get back to her.”
In early 2012, ERF contacted Whole Foods, again alleging infringement of ERF’s EATRIGHT trademarks. Whole Foods responded that it would cease use of the EATRIGHT AMERICA trademark by the end of the year. ERF contacted Whole Foods in September 2012, stating that the EATRIGHT AMERICA trademark was still being used widely in Whole Foods stores and again asking whether Whole Foods was interested in buying ERF’s EATRIGHT trademarks. Whole Foods responded in October 2012 that it was not interested. The next month, ERF again asked Whole Foods about a “potential brand purchase as a way to resolve outstanding infringement claims.” Whole Foods again stated it was not interested.
ERF did not sue Whole Foods until September 2013. Whole Foods motioned for, and the district court granted, summary judgment in favor of Whole Foods, finding that ERF’s claims were barred by both laches and acquiescence. ERF appealed.
The Ninth Circuit reversed. While the Court agreed that it was ERF’s burden to prove the reasonableness of delay, it disagreed that undisputed material facts established that ERF’s delay was unreasonable. The district court found that ERF’s delay was caused by its efforts to sell Whole Foods the EATRIGHT brand, not to settle the dispute. The Ninth Circuit stated that this determination “violated the cardinal rule of summary judgment: that disputed issues of material fact must be resolved in favor of the non-moving party.” ERF had presented evidence that it did not file suit until September 2013 because it was attempting to resolve the dispute without litigation. If the district court had credited that evidence, the district court could have determined that ERF’s delay in filing suit was reasonable. Instead, the district court resolved a dispute of material fact in favor of the moving party, Whole Foods.
The Ninth Circuit also faulted the district court’s determination with respect to prejudice, the other component of the laches defense. The district court found that Whole Foods had established expectations-based prejudice because Whole Foods had invested significantly in the EATRIGHT AMERICA brand prior to the lawsuit. This was error; expectations-based prejudice concerns only the actions a defendant took during plaintiff’s delay, not all actions it took with respect to the mark before the lawsuit was filed. Because the investments cited by the district court included actions Whole Foods took before ERF’s delay, the Ninth Circuit found that the district court’s finding of expectations-based prejudice was clearly erroneous.
Finally, the Ninth Circuit rejected the district court’s grant of summary judgment based on acquiescence, an affirmative defense that limits a plaintiff’s right to bring suit based on an affirmative act that indicates consent to a defendant’s use of a trademark. Acquiescence requires that the defendant prove that it reasonably relied on the plaintiff’s affirmative act. The Ninth Circuit found that the district court did not make factual findings concerning the reasonableness of Whole Foods’ reliance on ERF’s conduct.
The Ninth Circuit thus vacated the district court’s acquiescence finding and remanded for further proceedings.
“Love” Is Not Enough
The US Court of Appeals for the Ninth Circuit upheld a dismissal of claims that the mark SHARE THE LOVE was likely to cause confusion with the mark A WORLD OF LOVE, FOR YOU AND THOSE YOU LOVE, because the marks, considered in their entireties, are so facially dissimilar that they cannot plausibly create a likelihood of confusion. Marilyn D. Mintz v. Subaru of America, Inc., Case No. 16-16840 (9th Cir., Dec. 12, 2017) (per curiam) (non-precedential).
Marilyn Mintz filed a complaint claiming that Subaru’s use of the trademark SHARE THE LOVE for a holiday-season campaign that donates money from car purchases to various national and local charities was likely to be confused with her mark A WORLD OF LOVE, FOR YOU AND THOSE YOU LOVE, and was likely to dilute her mark. Mintz further alleged that Subaru’s mark infringed upon her copyrighted designs and publications.
To establish trademark infringement, a plaintiff must plausibly allege that the claimed infringing design and phrase are likely to cause confusion, to cause mistake or to deceive. To establish trademark dilution, a plaintiff must plausibly allege that the mark infringed upon is famous and distinctive and that use of the infringing mark is likely to cause dilution by blurring or dilution by tarnishment. Finally, to establish copyright infringement, a plaintiff must plausibly allege that the owner of the infringing works had access to the work infringed upon, and that the works at issue are substantially similar in their protected elements.
The district court dismissed Mintz’s trademark infringement claim, finding that the design and phrase used in Subaru’s campaign and Mintz’s trademarked phrase only share the generic word “love,” which could not be trademarked on its own and could not plausibly be the ground for an infringement claim. The district court also found that Subaru’s “design depicting a hand with a heart on it is plainly not similar to Mintz’s ‘Heart on Hand’ trademark except in the use of a common symbol. Mintz’s design includes a hand that is circumscribed by a heart and includes an entire body; Subaru’s design includes a hand that radiates blue beams and is not connected to a body.” The district court found that, considered in their entireties, “the designs are so facially dissimilar that they cannot plausibly create a likelihood of confusion.” The district court also dismissed Mintz’s trademark dilution claim and copyright infringement claims. Mintz appealed.
The Ninth Circuit affirmed, explaining that Mintz did not plausibly allege trademark infringement because the design and phrase used in Subaru’s SHARE THE LOVE campaign are obviously dissimilar from Mintz’s marks. For similar reasons, the Court affirmed the dismissal of Mintz’s dilution claims. Lastly, the Court upheld the district court’s dismissal of Mintz’s copyright claims, holding that Mintz did not plead sufficient facts showing that Subaru had access to Mintz’s work and that the works were substantially similar in protected elements.
Discovery Misconduct Can Cost More Than Just Your Case
The US Court of Appeals for the Second Circuit rejected a sanctioned party’s position that sanctions must be proportional to either the value of the evidence uncovered by remedial measures or the ultimate value of the case, and upheld discovery sanctions that amounted to greater than 100 times the district court’s appraisal of the likely damages in the case. Klipsch Group, Inc. v. ePRO E-Commerce Ltd., Case Nos. 16-3637; -3726 (2d Cir., Jan. 25, 2018) (Lynch, J). In doing so, the Court adopted a standard that “discovery sanctions should be commensurate with the costs unnecessarily created by the sanctionable behavior.”
At the district court, Klipsch, a manufacturer of sound equipment (including headphones), sued ePRO, alleging that ePRO sold counterfeit versions of its products. ePRO did not dispute that it sold some infringing products, but consistently presented evidence showing that the total infringing sales amounted to $8,000. Klipsch argued that the figure was closer to $5 million. Actual damages were subject to trebling.
During the course of discovery, ePRO engaged in a series of discovery abuses. ePRO initially failed to timely disclose the majority of responsive documents in its possession. Once this came to light, it agreed to retain a discovery vendor. Although the vendor discovered thousands of previously unproduced documents, there were indications that ePRO had artificially restricted the vendor’s access to electronic records. ePRO also failed to impose an adequate litigation hold, even after the court directed it to do so, and its custodians deleted thousands of documents, some permanently. As these and other abuses unfolded, the magistrate judge authorized various remedial measures, which included allowing Klipsch to take a second round of depositions and to undertake an independent forensic examination of ePRO’s computer systems.
Although the additional discovery failed to reveal any smoking gun, it confirmed that the infringing sales were unlikely to exceed the $8,000 figure posited by ePRO. The district court concluded that ePRO had engaged in willful spoliation, and granted Klipsch’s motions for (1) $2.7 million in sanctions to compensate for its corrective discovery efforts, (2) an asset restraint against ePRO in that amount, and (3) both permissive and mandatory jury instructions. The district court also found that ePRO represented a dissipation risk, and granted Klipsch’s request for a $2.3 million bond to preserve Klipsch’s ability to recover damages and fees at the end of the case. ePRO filed an interlocutory appeal challenging the district court’s evidentiary rulings and factual findings, contending that the sanctions were impermissibly punitive because the additional discovery did not support increased damages and the sanctions themselves were disproportionate to the likely value of the case.
The Second Circuit rejected ePRO’s argument, noting that at the time of the offending conduct, neither Klipsch nor the district court could have known what evidence the corrective measures would ultimately uncover. However, in light of ePRO’s conduct, it was reasonable for both to suspect that ePRO had concealed damaging evidence. The Court emphasized that the purpose of the sanctions was not to reward Klipsch for successful litigation but rather to compensate Klipsch for costs that it had reasonably incurred but should not, and otherwise would not, have had to bear.
Practice Note: ePRO’s experience presents a cautionary tale. Although damages in this matter were not likely to exceed $24,000, the Second Circuit approved restraints totaling $5 million. ePRO’ s conduct not only resulted in needless additional discovery and litigation, but damaged its credibility with the court and ultimately cost the company far more than it stood to lose in the underlying litigation.
Rejecting Trademarks and Exclusive Distribution Rights in Bankruptcy
The US Court of Appeals for the First Circuit concluded that a debtor in bankruptcy is entitled to reject grants of trademark licenses and exclusive distribution rights. Although Chapter 11 of the Bankruptcy Code protects a licensee’s rights to intellectual property when the licensor seeks reorganization, trademark licenses and exclusive distribution rights are not “intellectual property” that qualifies for this protection. Mission Product Holdings, Inc. v. Tempnology, LLC, Case No. 16-9016 (1st Cir., Jan. 12, 2018) (Kayatta, J) (Torruella, J, concurring in part, dissenting in part).
Tempnology made clothing and accessories (such as towels, socks and headbands) designed to remain cool even during exercise. Tempnology marketed these products under the brands “Coolcore” and “Dr. Cool,” and protected its products and brand names using patents, trademarks and other intellectual property rights. Tempnology’s business suffered heavy losses, so it sought reorganization under Chapter 11 and to reject some of its contracts that were still in effect.
One of those contracts was a “Co-Marketing and Distribution Agreement” between Tempnology and Mission. The agreement contained three provisions relevant to the Court’s analysis, in which Tempnology granted to Mission:
- An exclusive right to distribute certain Tempnology products
- A non-exclusive license to Tempnology intellectual property other than trademarks
- A non-exclusive license to certain Tempnology trademarks
The trademark license was accompanied by standard restrictions designed to ensure quality control for Mission’s use of the Tempnology trademarks.
Under Chapter 11 of the Bankruptcy Code, a debtor may “reject” executory contracts, which results in the other party losing the ability to compel the debtor’s performance. Section 365(n) contains an exception: when the debtor is a licensor of intellectual property rights, the licensee may retain its rights to the intellectual property. The parties disagreed on whether § 365(n) allowed Mission to retain its exclusive distribution rights and its trademark license.
The Court determined that § 365(n) does not protect exclusive distribution rights. An exclusive distribution right is simply a restriction on a right to sell certain products and is distinct from an intellectual property license. Mission could have this exclusive distribution right even if it did not have an intellectual property license. Section 365(n) does not protect an exclusive right to sell merely because the right appears in an agreement that also contains an intellectual property license.
The Court also determined that § 365(n) does not allow a licensee to retain rights under a trademark license. The definition of “intellectual property” in § 365(n) lists six types of intellectual property, none of which are trademarks. The purpose of a debtor’s ability to reject executory contracts is to allow the debtor to free itself of certain obligations and achieve a successful reorganization. A trademark license might impede such a result, because trademark license agreements generally require the licensor to maintain quality control over products bearing the licensed trademark. Such obligations existed in the Tempnology-Mission agreement, including standard obligations prohibiting Mission from using the trademarks in a disparaging way, requiring Mission to use the trademarks in compliance with Tempnology’s trademark usage guidelines, and giving Tempnology the right to review and approve Mission’s use of the marks. Allowing Mission to retain its trademark license would be contrary to the purpose of freeing Tempnology of obligations in its executory contracts.
Distinguishing “Expressly Aimed” Conduct from a “Substantial Connection”
Addressing the issue of personal jurisdiction under the Illinois long arm statute, the US Court of Appeals for the Seventh Circuit reversed the district court’s holding that Ariel Capital Investors had infringed Ariel Investments’ trademarks under the Lanham Act. Ariel Investments, LLC v. Ariel Capital Advisors LLC, Case Nos. 17-1516; -2645 (7th Cir., Jan. 31, 2018) (Easterbrook, J).
Ariel Investments, an Illinois-based investment company, brought suit in Illinois against Florida-based Ariel Capital, alleging that its name choice was infringing on Ariel Investments’ trademarks. As the Lanham Act does not authorize nationwide service of process, Ariel Investments was required to establish personal jurisdiction under Illinois law. After a district judge for the Northern District of Illinois found in favor of Ariel Investments on its claims, Ariel Capital appealed, arguing that the court lacked personal jurisdiction under the Illinois long arm statute.
The Illinois long arm statute permits service to the constitutional limits of its power. Ariel Capital does not have any clients or property in Illinois, does not advertise in Illinois, and has never had an agent visit Illinois. Regardless, the district court found the exercise of personal jurisdiction proper, reasoning that Ariel Capital knew or should have known that its choice of name would injure Ariel Investments in Illinois. In the district court’s view, Ariel Capital’s decision “to trade on the reputation and goodwill of an Illinois entity” was sufficient to establish a relationship between Ariel Capital and the forum state of Illinois. Ariel Capital appealed.
The Seventh Circuit reversed, finding the Supreme Court of the United States’ decision in Walden v. Fiore controlling. In Walden, the Supreme Court held that knowledge that an injury would occur in the forum state, even when conduct was “expressly aimed” at a resident of that state, was not sufficient to confer personal jurisdiction. Rather, a state may assert specific jurisdiction—jurisdiction based on a particular transaction—only when the defendant has created “a substantial connection with the forum state.” This requirement of a “substantial connection” is not satisfied by the defendant’s contacts with a resident of the forum state.
The district court based its decision on Ariel Capital’s conduct towards an Illinois entity, in particular that “Ariel Capital had set out to injure Ariel Investments, knowing that it is located in Illinois.” The Seventh Circuit rejected this rationale, stating that, “[n]o matter how one might characterize the relationship between Ariel Investments and Ariel Capital, it is easy to describe the relationship between Illinois and Ariel Capital: none. That resolves this litigation.” Subjecting a defendant to personal jurisdiction anywhere it aims its actions “is incompatible with Walden.”
Practice Note: When determining if personal jurisdiction is satisfied under the Lanham Act, exercise caution even where the relevant state’s long arm statute authorizes jurisdiction to the constitutional limits of its power. The defendant must have some specific contact with the forum state itself; knowledge of injury or intent to cause injury in the state is not sufficient.
Scraping Is OK, Copying Proprietary Software Is Not
Rimini, an enterprise software support provider, provides Oracle’s enterprise software updates to licensees of Oracle’s software. In doing so, Rimini competes with Oracle’s direct maintenance services. To obtain Oracle’s software, Rimini used automated downloading tools and copied the software from Oracle’s website. Oracle sued Rimini for copyright infringement and claims under the California Comprehensive Data Access and Fraud Act and the Nevada Computer Crimes Law. A jury found against Rimini on the claims and awarded Oracle $124 million. Rimini appealed, and the Electronic Frontier Foundation (EFF) filed an amicus with respect to the California and Nevada state computer law claims.
Addressing the issue of copyright infringement, the Ninth Circuit affirmed the district court’s finding that Rimini infringed Oracle’s copyright by copying its software. The Court rejected Rimini’s argument that the licenses held by Oracle licensees gave Rimini the right to copy the software under the license of one customer for work done for other customers. The Court pointed out that licensees may hire a third party, such as Rimini, to maintain their software for them, but nothing in the licenses permits licensees to grant a non-party to the license a general right to copy proprietary software.
The Court reduced the amount of the award by approximately $50 million, reversed the permanent injunction against Rimini, and reversed the district court’s determination that Rimini violated California’s Unfair Competition Law.
No “Happy Together” Ending for Common Law Public Performance Rights in Florida
In a multi-jurisdictional dispute between a band and a satellite radio provider, the US Court of Appeals for the 11th Circuit adopted reasoning similar to that of the New York Court of Appeals (IP Update, Vol. 20, No. 3) in finding that the band’s copyright infringement claim against the satellite radio provider must fail, since Florida common law does not recognize an exclusive right in public performance in pre-1972 sound recordings. Flo & Eddie, Inc. v. Sirius XM Radio, Inc., Case No. 15-13100 (11th Cir., Jan. 5, 2018) (per curiam).
The decision comes in one of several lawsuits against online music providers filed by Flo & Eddie (members of the band the Turtles) seeking royalty payments for broadcasts of several of the band’s recorded performances (e.g., “Happy Together,” “She’d Rather Be with Me”). Because each of the recordings of the public performances was fixed prior to 1972—before the effective date of protection under the Copyright Act of 1976—they enjoy copyright protection only under state law, if at all.
The 11th Circuit’s decision followed certification of four questions to the Supreme Court of Florida. The dispositive question was, “[d]oes Florida common law recognize the exclusive right of public performance in pre-1972 sound recordings?” Given the absence of supporting Florida case law establishing such a common law right, and finding no legislative equivalent, the Florida court answered the question in the negative.
With the Florida Supreme Court’s guidance on the applicable state law, the 11th Circuit found that Sirius XM did not infringe on Flo & Eddie’s exclusive right of public performance in its sound recordings when Sirius XM played the Turtles’ recordings over the internet and via its satellites. The Florida Supreme Court’s holding also foreclosed Flo & Eddie’s claim of infringement on its exclusive right of reproduction in the sound recordings, as well as claims of unfair competition and misappropriation, common law conversion and statutory civil theft, since all claims relied on the existence of a common law copyright. Thus, the 11th Circuit affirmed the district court’s 2014 decision in Sirius XM’s favor.
Practice Note: Recent decisions from the Second and 11th Circuits effectively place pre-1972 recordings in the public domain in those jurisdictions. If the pending dispute in California between Flo & Eddie and Pandora Media reaches a different conclusion, the market for public performance of these recordings may remain unsettled and possibly subject to future legislation.