IP Update, Vol. 19, No. 11

Evolving Post-Alice Law on Patent Eligibility

In two recent cases addressing patent eligibility of software patent claims, the US Court of Appeals for the Federal Circuit found the challenged claims patent ineligible. In both cases, the Federal Circuit cited its Enfish decision (IP Update, Vol. 19, No. 6) and its McRO decision (IP Update, Vol. 19, No. 10) in delineating what qualifies as patent-eligible subject matter in software patent claims. FairWarning IP, LLC v. Iatric Systems, Inc., Case No. 15-1985 (Fed. Cir., Oct. 11, 2016) (Stoll, J); Synopsys, Inc. v. Mentor Graphics Corporation, Case No. 15-1599 (Fed. Cir., Oct. 17, 2016) (Chen, J).

In FairWarning, the patent at issue related to detecting fraud and misuse by identifying unusual patterns in users’ access to sensitive data. According to the patent specification, pre-existing systems were able to record audit log data concerning user access of digital stored sensitive data. The invention aimed to automate this process by recording the sensitive data, analyzing the stored data against a rule, and providing a notification if the analysis detected misuse. After FairWarning sued Iatric alleging patent infringement, Iatric moved to dismiss the complaint on § 101 grounds. The district court granted the motion, concluding that the claims were not patent eligible under § 101. FairWarning appealed.

The Federal Circuit affirmed, finding that the patent claims were directed to an abstract idea. The Court explained that the “realm of abstract ideas” includes collecting information, and that the idea of analyzing data, including user identifier data, was abstract. The Court also concluded that the claimed invention relied on a combination of abstract-idea categories previously recognized by the Court. Citing McRO, the Court explained that the claimed rules (in the McRO cases) transformed a traditionally subjective process performed by human artists into a mathematically automated process executed on computers, explaining that “it was the incorporation of the claimed rules . . . that improved the existing technological process.” In McRO, the Court found that the traditional process, as compared to the claimed method, stood in contrast, and noted that while both practices produced a similar result, they operated in fundamentally different ways.

Here, the Federal Circuit found the claims at issue distinguishable from those at issue in McRO, explaining that the asserted claims merely implemented an old practice in a new environment. The Court explained that the claimed rules in FairWarning recited “the same questions . . . that humans in analogous situations detecting fraud have asked,” concluding that the incorporation of a computer—not the claimed rules—purportedly improved the existing technological process.

The Court also cited its Enfish decision, explaining that the technical improvement recited in the claims in Enfish stands in contrast to the FairWarning patent claims, which did not recite any technical improvement. Any speed increase in performing the claimed process of analyzing audit log data was the result of the capabilities of a general-purpose computer, not the claimed method.

Under the Alice step-two inquiry, the Federal Circuit concluded that the asserted claim limitations failed to add “something more” to “transform” the claimed abstract idea into “a patent-eligible application,” explaining that the use of generic computers, such as a microprocessor or user interface, does not transform an otherwise abstract idea into patent-eligible subject matter.

In Synopsys, the patent at issue related generally to the logic circuit design process. The claimed subject matter was directed to a process for interpreting hardware description language (HDL) code that uses predetermined assignment conditions to identify a circuit diagram as the hardware that performs the function recited in the HDL code, where the hardware is represented as a level sensitive latch. After Synopsys sued Mentor Graphics alleging patent infringement, Mentor Graphics moved for summary judgment that the asserted claims were not patent eligible. After the district court granted the motion, Synopsys appealed.

The Federal Circuit agreed with the district court that the idea of translating a functional description of a logic circuit into a hardware component description of the logic circuit was abstract, dismissing the patent owner’s argument that the asserted claims were directed to patent–eligible subject matter because the claimed subject matter related to complex algorithms used in computer-based synthesis of logic circuits. Most notable was the Court’s recognition that the district court did not construe any of the asserted claims to require the use of a computer—general purpose or otherwise—or any other type of hardware. The Court concluded that the incorporation of software code alone cannot invoke the Court’s Enfish and McRO decisions, explaining that the asserted claims on their face did not call for any computer implementation of the claimed functions, such as employing a computer or any other physical device.

Regarding step two of the Alice inquiry, the Federal Circuit cited its decisions in DDR Holdings (IP Update, Vol. 18, No. 1) and BASCOM (IP Update, Vol. 19, No. 8) for guidance. In DDR Holdings, the claims at issue involved a technological solution that overcame a specific challenge unique to the internet that ultimately amounted to the requisite inventive concept. In BASCOM, the requisite inventive concept was found “in the non-conventional and non-generic arrangement of known, conventional pieces.” The Court found the Synopsys claims distinguishable from those at issue in DDR Holdings and BASCOM, explaining that the challenged claims contained no limitations that addressed the alleged technical improvements of using assignment conditions as an intermediate step in the translation process.

In its inventive concept inquiry, the Federal Circuit explained that the search for a § 101 inventive concept is distinct from demonstrating § 102 novelty, dismissing the patent owner’s argument that the challenged claims were not shown to have been anticipated by, or obvious over, the prior art and therefore did not employ conventional computer technology. The Court noted that even a claim directed to a new abstract idea is still an abstract idea. Thus, these claims were also found to be patent ineligible under Alice.

Prosecution History Disclaimer of Claim Scope Must Be “Clear and Unambiguous” in View of the Prosecution History as a Whole

Addressing the issue of prosecution history disclaimer, the US Court of Appeals for the Federal Circuit upheld the district court’s claim construction, finding that selected statements during prosecution did not constitute a “clear and unambiguous” surrender of claim scope when considered in the context of the prosecution history as a whole. Mass. Inst. of Tech. v. Shire Pharm., Inc., Case No. 15-1881 (Fed. Cir., Oct. 13, 2016) (Stoll, J) (O’Malley, J, concurring).

The claims at issue were drawn to synthetic, biodegradable scaffolds upon which cells can grow in vitro to generate artificial tissues that can be administered to a patient. Scaffolds for cell growth had been used in the prior art to grow thin layers of artificial skin but were limited because blood vessels could not penetrate the artificial tissue, and as a result cells in the middle of a thicker tissue would die from lack of oxygen. The improved scaffolds developed by MIT scientists addressed this problem by supporting blood vessel growth, thereby allowing for the growth of thicker tissue implants, such as intestine, kidney, liver, blood vessel, nerve and muscle tissues, as well as thicker skin tissues.

The claims specified that the “cells derived from a vascularized tissue” attach to the claimed “three-dimensional scaffold” to generate “vascularized organ tissue.” The district court construed these claim terms according to their plain and ordinary meaning, and Shire challenged these constructions.

With respect to the “vascularized tissue” terms, Shire pointed to several statements made during prosecution in Examiner interviews, inventor declarations and office action responses as allegedly limiting the claim scope to non-skin tissues (a construction that would allow Shire’s artificial skin grafts to avoid infringement).

The Federal Circuit upheld the district court’s rejection of Shire’s arguments, noting that a “clear and unambiguous disclaimer” of subject matter that would be “evident to one skilled in the art” is required to meet the “high standard” for prosecution history disclaimer. To assess whether such a disclaimer rises to the level of clear and unambiguous, “it is important to consider the statements made by the applicant both in the context of the entire prosecution history and the then-pending claims.” Although Shire had “plucked” several allegedly limiting statements from the prosecution history, which spanned more than 10 years, the Court noted that those statements were not made with respect to the claim terms at issue, but instead were made with respect to different claim language that did not even end up in the claims that finally issued. According to the Court, a skilled person reading the prosecution history as a whole would not understand those statements, taken out of context, to disclaim the ordinary meaning of the terms at issue.

With respect to the “three-dimensional scaffold” claim term, Shire argued that it was indefinite. The Court upheld the district court’s construction that was based on the accepted, ordinary meaning of the term as found in dictionaries. Shire objected to this evidence because the dictionaries were from the present day and not from the time of filing, but Shire failed to explain how contemporaneous dictionaries would have defined the term any differently. Moreover, the Court found it persuasive that Shire’s expert gave an opinion that was consistent with the plain meaning. For all of these reasons, the claim language was found to be definite under Nautilus.

Judge O’Malley concurred with the opinion and its reasoning, but wrote separately about a procedural issue. In particular, she reiterated her well-known position that patent cases are not final until the district court has determined damages and/or willfulness, and that the Federal Circuit should not have taken the present case. The Court’s Bosch decision (IP Update, Vol. 16, No. 6) continues to be good law, but at least one member of the bench is holding steady that Bosch was wrongly decided.

Disavowal of Claim Scope in a Trash Bag Patent

The US Court of Appeals for the Federal Circuit affirmed a district court’s narrow claim construction, finding that the specification and prosecution history of the patent-at-issue contained clear and unequivocal statements that the inventor intended to limit the claim scope. Poly-America, L.P. v. API Industries, Inc., Case No. 16-1200 (Fed. Cir., Oct. 14, 2016) (Reyna, J).

Poly-America owns a patent directed to an improved construction of an elastic drawstring trash bag. The district court, relying on the patent’s specification and prosecution history, construed the term “short seal” to mean “[a] seal for securing the elastic drawstring, which seal is located adjacent to a side seal, and that is not substantially aligned with the side seal, but extends inwardly from the interior edge of the side seal.” Following claim construction, Poly-America stipulated to non-infringement, and the district court entered final judgment in API’s favor. Poly-America appealed, arguing that by construing the term “short seal” to require inward extension, the district court improperly imported limitations from the embodiments described in the specification, misread the prosecution history and ignored principles of claim differentiation.

On appeal, the Federal Circuit reviewed the district court’s claim construction de novo because the district court relied solely on intrinsic evidence. The Federal Circuit found that the inventor disavowed trash bags with short seals that do not extend inwardly to narrow the upper opening width in relation to the bag proper width.

The Federal Circuit found that the inventor disavowed claims lacking short seals by emphasizing short seals as a characteristic of the claimed invention in the written description. Additionally, the inventor disavowed claims lacking short seals because the written description states that prior art bags are difficult to secure over trash receptacle lids because of the absence of this feature, which is designed to make it easier to fit the bag around a trash can. Further, the prosecution history demonstrates that Poly-America distinguished its claimed invention from the cited prior art based on the fact that the patent describes bags that extend inwardly to narrow the upper opening width in relation to the bag proper width. Because of the many instances of disavowal, the Federal Circuit found it irrelevant that the terms “bag proper width” and “relaxed upper opening width” are not present in the claim; in light of the written description, it is clear that all of the claimed trash bags must have these features.

The Court explained that the district court’s analysis did not improperly import limitations from embodiments described in the written description because every embodiment described in the written description has inwardly extended short seals, and every section of the written description emphasizes the importance of this feature. Further, the Court found that claim differentiation principles cannot be used to broaden claims beyond their meaning in light of the patent as a whole and cannot override clear statements of claim scope found in the specification and prosecution history.

Hard to Reverse Adverse PTAB Rulings Under Substantial Evidence Standard

Over a vigorous dissent, the US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB or Board) decision affirming rejection of all pending claims of a patent as being obvious, as supported by substantial evidence notwithstanding a showing of commercial success. In re: Efthymiopoulos, Case No. 16-1003 (Fed. Cir., Oct. 18, 2016) (Prost, CJ) (Newman, J, dissenting).

The patent application at issue related to methods of treating or preventing influenza by administering the drug zanamivir by oral inhalation. The Examiner, affirmed by the PTAB, rejected all pending claims as obvious, primarily over two prior art references: Von Itzstein II in view of Von Itzstein I.

The Federal Circuit agreed with the PTAB’s conclusion that the pending claims were obvious as supported by substantial evidence. In doing so, the majority opinion noted that Von Itzstein I disclosed the intranasal use of zanamivir to treat and prevent influenza, and that Von Itzstein II disclosed different administration methods, including “inhalation,” for an adjacent homologue of zanamivir to achieve the same result of treating or preventing influenza. Although Von Itzstein II did not teach oral inhalation specifically, the Federal Circuit agreed with the Examiner and PTAB’s conclusion that Von Itzstein II’s disclosure of administration through “inhalation” included oral inhalation. As to secondary considerations of non-obviousness, the Federal Circuit found that the PTAB, after thoroughly considering an expert’s declaration, properly concluded that the claimed method would not necessarily yield an unexpected result.

Judge Newman dissented, stating that zanamivir was a known drug for treatment of influenza administered by nasal inhalation. She disagreed with the majority’s holding that the discovery of effective treatment by oral inhalation was obvious even though it was “not obvious to experts, and not suggested in the prior art.” Judge Newman noted that there was extensive discussion in Von Itzstein II directed to all known forms of oral administration of the product that spanned several pages, but that it lacked any mention or suggestion of oral inhalation. She voiced her concern that it “cannot be ‘obvious to try’ the only form of oral administration that is absent from the Von Itzstein [II] recitations.” Rather, the omission of oral inhalation from this list of “all the ‘known options’ for this drug makes conspicuously clear that oral inhalation was not an ‘identified predictable solution.’” Judge Newman concluded that there was not substantial evidence to support the PTAB’s ruling of obviousness.

Reconsideration of Institution Decisions Is Also “Final and Nonappealable”

In an opinion addressing whether a decision by the Patent Trial and Appeal Board (PTAB or Board) to reconsider a decision on institution is “final and nonappealable,” the US Court of Appeals for the Federal Circuit reaffirmed its original panel decision holding that a determination by the PTAB to discontinue inter partes review (IPR) is not reviewable on appeal. Medtronic, Inc. v. Robert Bosch Healthcare Sys., Inc., Case Nos. 15-1977; -1986; -1987 (Fed. Cir., Oct. 20, 2016) (Dyk, J).

Bosch sued Cardiocom, a division of Medtronic, in district court, alleging infringement of two patents owned by Bosch. Cardiocom petitioned for IPR of those two patents, but the petitions were denied. Medtronic then filed three petitions seeking IPR of the two patents, listing Medtronic as the sole real party in interest. After the PTAB instituted IPR proceedings, Bosch moved to terminate the proceedings, alleging that Medtronic had failed to name all real parties in interest. The PTAB granted Bosch’s motions, vacated the institution decisions and terminated the proceedings. Medtronic appealed.

Bosch moved to dismiss the appeal for lack of jurisdiction, asserting that the PTAB’s decisions were not appealable under 35 USC § 314(d). The Federal Circuit dismissed the appeal and denied Medtronic’s mandamus relief. Medtronic then petitioned for rehearing, and, following the Supreme Court of the United States’ decision in Cuozzo Speed Technologies v. Lee (IP Update, Vol. 19, No. 7), the Federal Circuit recalled the mandate and requested supplemental briefing addressing the issue of appealability in view of Cuozzo.

The Federal Circuit concluded that the PTAB’s decision to reconsider institution of IPR is, like the original institution decision, “final and nonappealable” under § 314(d). As the Supreme Court explained in Cuozzo, § 314(d) operates to bar questions “closely related” to the application and interpretation of statutes related to the US Patent and Trademark Office’s decision to institute IPR. A reconsideration of the decision to institute proceedings is “closely related” to the original decision, especially when the PTAB’s reconsideration is predicated on a failure to meet the statutory requirements for institution. Medtronic argued that Cuozzo did not bar review here because the PTAB exceeded its statutory authority when it terminated the proceedings on a non-merits issue. The Federal Circuit disagreed, finding that administrative agencies possess inherent authority to reconsider their decisions.

PTO Releases New Memo on Recent Subject Matter Eligibility Decisions

In a memorandum to patent examiners dated November 2, 2016, the US Patent and Trademark Office (PTO) addressed recent subject matter eligibility decisions. The memorandum was spurred by two precedential US Court of Appeals for the Federal Circuit decisions: McRO, Inc. v. Bandai Namco Games America, Inc. (IP Update, Vol. 19, No. 10) and BASCOM Global Internet Servs. v. AT&T Mobility LLC (IP Update, Vol. 19, No. 8).

The memorandum noted that McRO and BASCOM do not change the PTO’s basic subject matter eligibility (SME) guidelines. According to the memorandum, McRO and BASCOM highlight several factors that examiners should consider when determining whether an application claims eligible subject matter. For example, the memo reminded examiners that they “should consider the claim as a whole under Step 2A of the SME guidance, and should not overgeneralize the claim or simplify it into its ‘gist’ or core principles, when identifying a concept as a judicial exception.”

The memorandum further explained that improvements in computer-related technology were not limited to improvements in computer operation, but could also be a set of “rules” (mathematical relationships) that allow the computer to perform functions not previously performable by a computer. The memorandum encouraged examiners to look to the specification for teaching about how, if at all, the invention improves a computer or other technology, and to determine whether a particular solution to a problem or a particular way of achieving a desired outcome is defined by the claims.

In view of BASCOM, in which the Federal Circuit found patent eligibility even though the individual elements of the claimed system were generic computer, network and internet components, the memo reminded examiners to consider whether the claimed elements in combination result in a non-generic, non-conventional arrangement of elements.

The PTO indicated that it would address the issue of preemption in a forthcoming update to its SME guidance. However, “[i]f an applicant argues that a claim does not preempt all applications of the exception, an examiner should reconsider in Step 2A of the eligibility analysis whether the claim is directed to . . . a specific way of achieving a desired outcome or end result.” The update also will discuss the eligibility decision in Amdocs (Israel) Ltd. v. Openet Telecom, Inc. (IP Update, Vol. 19, No. 12, forthcoming), which the Federal Circuit issued just one day before the PTO released its memorandum.

Finally, in view of the increasing number of precedential SME decisions, the PTO instructed examiners to avoid relying upon or citing non-precedential decisions unless the facts of the application “uniquely match the facts at issue in the non-precedential decision.”

Practice Note: Practitioners should review the SME updates when drafting claims that are likely to be subject to § 101 scrutiny or when traversing § 101 rejections, as the PTO instructions seem to present opportunities to avoid or overcome § 101 rejections.

Disclaimer of Financial Claims May Avoid Eligibility for CBM Review

In defining what patents qualify as covered business method (CBM) patents under 37 CFR § 42.301(a), the Patent Trial and Appeal Board (PTAB or Board) continues to reach diverse and divided panel decisions. Various PTAB cases have weighed how explicitly the claims must be tied to a financial product or service, and what role the specification plays in that determination (IP Update, Vol. 19, Nos. 4–6). Now, in another decision, the PTAB remains divided on its approach to CBM eligibility, especially when a patent owner disclaims the only explicitly financial claims that otherwise would have given rise to CBM eligibility. Plaid Technologies, Inc. v. Yodlee, Inc., Case No. CBM2016-00070 (PTAB, Oct. 6, 2016) (Kaiser, APJ) (Kim, APJ, dissenting).

The PTAB panel majority in Plaid Technologies found that none of the challenged claims were “explicitly or inherently” financial as it construed the claim language, and thus denied review. This ruling was a consequence of the fact that the patent owner disclaimed, under 35 USC § 253(a), the only claims that were expressly directed to financial products or services. Because of the disclaimer, the PTAB treated those claims as if they had never existed and found the remaining claims to be of general applicability. Those remaining claims were broadly directed to taking device-specific internet data and restructuring it to a different format that could be viewed generically on many types of devices without additional hardware and/or software. Although the remaining claims were broad enough to cover data and information associated with financial services, the panel concluded that they did not explicitly or inherently relate to financial activity.

The dissent argued that a patent owner’s disclaimer was not effective to avoid eligibility for CBM review. The dissent agreed that a disclaimer voided the claims themselves but argued that such a disclaimer could not erase the voided claims’ impact on the scope of the remaining claims, because originally filed claims remain part of the specification and prosecution history, regardless of their eventual status as “disclaimed.” The dissent further argued that in light of the discussion in the underlying specification of associated financial products in conjunction with the scope of the originally filed dependent claims that were explicitly financial in nature, the remaining claims clearly encompassed activities that were financial in nature.

PTAB Uses § 315(e)(1) Estoppel to Narrow IPR Scope

In two recent final written decisions (FWDs) rendered in inter partes review (IPR) proceedings, the Patent Trial and Appeal Board (PTAB or Board) narrowed the scope of the proceedings by terminating the proceedings with respect to claims that had already received a FWD in a prior IPR by the same petitioner. Ford Motor Company v. Paice LLC & The Abell Foundation, Inc., Case No. IPR2015-00784 (PTAB, Oct. 21, 2016) (Medley, APJ); Ford Motor Company v. Paice LLC & The Abell Foundation, Inc., Case No. IPR2015-00792 (PTAB, Oct. 25, 2016) (DeFranco, APJ). In doing so, the PTAB emphasized that once a petitioner has received a FWD against claims in one IPR, the PTAB will dismiss those claims from any future IPR involving the patent and the same petitioner.

Ford filed IPR petitions against two of Paice’s patents directed to hybrid vehicle engine management systems. For each of the two challenged patents, Ford had filed earlier IPR petitions resulting in the institution of a trial. None of those earlier IPRs had been finally decided at the time of institution of the two newer IPRs. Subsequent to institution in the later IPRs, Ford prevailed in FWDs for the earlier IPRs against each of the two patents, with a number of the claims in each patent being found unpatentable.

After the FWDs in the earlier IPRs, Paice filed its patent owner response for the later IPRs, arguing that, under 35 USC § 315(e)(1), Ford was estopped from maintaining its challenges in the newer IPRs against the claims challenged in the earlier proceedings. In each case, Ford made no arguments as to why it could not have raised the new challenges in the earlier proceeding. In the FWD for each of the newer IPRs, the PTAB agreed with Paice, dismissing the earlier-adjudicated claims from the later proceeding.

Underpinning the decision in each case was the fact that Ford had nowhere argued that it could not have reasonably raised its newer challenges in the earlier proceedings. The PTAB noted for one of the IPRs that the main prior art reference was listed on the face of the challenged patent and was cited during prosecution of the application for the patent. For the other IPR, Ford had relied on the same prior art that it had used in the earlier proceeding. Because the estoppel provisions of § 315(e)(1) prohibit maintaining a challenge against a claim based “on any ground that the petitioner raised or reasonably could have raised” in the earlier IPR, the PTAB dismissed the claims from the later IPRs.

Practice Note: Since Ford had already prevailed against the claims that the PTAB dismissed from the later proceedings, Ford did not suffer any real loss in the later IPRs. In each case, Paice had made pre-institution arguments that Ford’s later IPRs should be dismissed under § 325(d) as representing multiple unfair “bites at the apple.” Those § 325(d) arguments were unavailing.

PTAB Reverses Obviousness Finding After Remand

The Patent Trial and Appeal Board (PTAB or Board) reversed its previous decision invalidating claims of a patent covering a coaxial cable connector after the US Court of Appeals for the Federal Circuit found that the PTAB erred in construing one of the claim terms. Corning Optical Communications RF, LLC v. PPC Broadband, Inc., Case No. IPR2013-00342 (PTAB, Oct. 12, 2016) (Zecher, APJ).

Corning Optical Communications filed a petition requesting inter partes review (IPR) of claims of a patent covering a coaxial cable connector. The PTAB determined that there was a reasonable likelihood that the claims were invalid in light of the prior art raised in the petition. The PTAB therefore instituted the IPR proceeding. During this proceeding, the PTAB construed the term “reside around” to mean “in the immediate vicinity of; near” rather than “encircle or surround.” The PTAB based this construction on competing dictionary definitions in light of the fact that the specification did not contain the term, and that the preamble of an independent claim used the term “surrounded,” which suggested that the inventors intended “reside around” to have a different meaning than surround. The IPR proceeding concluded in the issuance of a final written decision that the claims were invalid in light of the prior art raised in the petition.

The patent owner, PPC Broadband, appealed the PTAB’s final written decision to the Federal Circuit (IP Update, Vol. 19, No. 3). In this appeal, PPC again asserted that the broadest reasonable meaning of the term “reside around” was “encircle or surround.” The Federal Circuit agreed with PPC and found that the PTAB’s construction was not the broadest reasonable meaning of the term “reside around” in light of the specification. The Federal Circuit based its conclusion in part on the claim construction canon that different claim terms should be given different meanings does not apply to a non-limiting preamble. In addition, the Federal Circuit found that the specification’s use of the word “around” supported PPC’s construction. Based on this changed construction, the Federal Circuit remanded the case to the PTAB.

In light of the Federal Circuit’s construction and additional submission from the parties, the PTAB found that the prior art in Corning’s IPR petition did not invalidate the claims of a patent covering a coaxial cable connector.

Ninth Circuit Joins Octane Fitness Trend for Trademark Cases

In 2014, the Supreme Court of the United States issued its ruling in Octane Fitness (IP Update, Vol. 17, No. 5), in which it examined the fee-shifting provision of the Patent Act and clarified the types of “exceptional” cases that would allow a court to award reasonable attorneys’ fees to the prevailing party. Instead of requiring bad faith or malicious conduct on the part of a losing patent litigant, Octane Fitness adopted a “totality of the circumstances” analysis, under which a prevailing party must show that a case is “exceptional” by a preponderance of the evidence. Although Octane Fitness was an interpretation of the Patent Act only, litigants and courts were quick to acknowledge that the language of the fee-shifting provision in the Lanham Act is “parallel and identical” to its patent counterpart. Almost immediately, district courts began examining fee awards in trademark cases under the new standard, and the US Courts of Appeals for the Third through Sixth Circuits adopted the Octane Fitness approach to those trademark disputes.

Now an en banc panel of the US Court of Appeals for the Ninth Circuit has vacated an earlier panel ruling that affirmed a district court’s refusal to award attorneys’ fees sought by the prevailing party in a trademark dispute, stating that it was joining “the majority of our sister circuits” in concluding that Octane Fitness has altered the analysis of fee applications under the Lanham Act. SunEarth, Inc. v. Sun Earth Solar Power, Case Nos. 13-17622; 15-16096 (9th Cir., Oct. 24, 2016) (Wilken, J). The Court also applied the Supreme Court’s decision in Highmark (IP Update, Vol. 17, No. 5), confirming that courts of appeal should review a district court’s award of fees for abuse of discretion instead of de novo.

The SunEarth appeal stems from a dispute over the scope and violation of an injunction pertaining to Sun Earth Solar Power and its subsidiary NBSolar USA (collectively, SESP) regarding infringing use of the SUN EARTH trademark in the solar products space. When SunEarth, Inc., filed suit against SESP for violating the injunction through infringing activity, SunEarth requested attorneys’ fees under the Lanham Act’s “exceptional case” provision. The district court and the Ninth Circuit each concluded that the case was not exceptional because “SESP’s infringing conduct was the result of a negligent failure to investigate, not ‘malicious, fraudulent, deliberate, or willful’ infringement.” The original Ninth Circuit panel stated that it was bound to the more restrictive pre-Octane Fitness standard in view of a 2015 decision issued by the court in which the stricter standard was reiterated.

The en banc panel, however, focused on the need to interpret the fee-shifting provisions in the Patent Act and the Lanham Act “in tandem.” The Ninth Circuit now requires that district courts analyze a request for fees under the Lanham Act to examine the totality of the circumstances to determine if the case is exceptional. The Court confirmed that the Supreme Court’s non-exclusive Octane Fitness factors for assessing exceptional cases—such as frivolousness, motivation and objection unreasonableness in both the factual and legal components of the case—should be examined. With that guidance, the case was returned to the three-judge appellate panel to address the remaining issues.

Amazon.com Does Not Have to Put Out the Fire

Addressing an interlocutory appeal, the US Court of Appeals for the 11th Circuit affirmed a district court’s denial of a preliminary injunction against Amazon.com for trademark infringement, agreeing that the plaintiff’s motion was too little, too late. Wreal, LLC v. Amazon.com, Inc., Case No. 15-14390 (11th Cir., Oct. 28, 2016) (Rosenbaum, J).

Wreal is an online internet protocol television (IPTV) service provider. Since 2007, Wreal has been streaming adult content through its website, FyreTV.com, and proprietary set-top boxes (STBs). The STBs, called the “FyreTV box” and the “FyreBoXXX,” have been sold exclusively through Wreal’s website to customers that sign up for a FyreTV account. Wreal registered the trademarks “FyreTV” and “FyreTV.com” with the US Patent and Trademark Office in October 2008.

In 2011, Amazon started using the mark “Fire” in connection with its Kindle Fire tablet. Amazon continued the use of the “Fire” brand, along with its “Amazon” house mark, as it launched several new generations of mobile devices and internet appliances. In April 2014, Amazon launched its STB, which it markets as the “Amazon Fire TV.” Amazon was aware of Wreal’s “Fyre TV” mark when it launched Fire TV but did not contact Wreal before launching its service.

Wreal filed a complaint two weeks after Amazon launched its STB, alleging trademark infringement and unfair competition. Relying on a theory of reverse-confusion, Wreal asserted that Amazon’s dominant market position would likely cause consumers to mistakenly believe that Amazon was actually the source of Wreal’s Fyre TV or FyreBoXXX. After filing its complaint, Wreal conducted no discovery, made only routine case management filings and waited five months to move for a preliminary injunction.

Wreal was on notice that to succeed on its preliminary injunction motions, it needed to explain its five–month delay, yet it never provided the district court with a reason. The district court found that Wreal’s unexplained five–month delay in seeking a preliminary injunction fatally undermined any showing of irreparable injury, one of the four requirements for obtaining accelerated relief. The district court noted that a plaintiff concerned about a harm that it truly believed to be irreparable would and should act swiftly to protect itself. Wreal appealed.

The 11th Circuit affirmed the district court’s denial of a preliminary injunction, describing Wreal’s pace in filing its motion as “someone out on a meandering evening stroll rather than someone in a race against time.” A delay in seeking a preliminary injunction of even only a few months, although not necessarily fatal, militates against a finding of irreparable harm. Consistent with its sister circuits, the 11th Circuit found that a party’s failure to act with speed or urgency in moving for a preliminary injunction necessarily undermines a finding of irreparable harm.

11th Circuit Shoots Down Firearms Retailer’s Appeal in Trademark Infringement Case

Addressing issues of priority and secondary meaning, the unlawful use defense and the right to jury trial, the US Court of Appeals for the 11th Circuit affirmed a district court’s judgment in favor of a firearms manufacturer in a trademark infringement case concerning another firearms retailer’s use of the trademark SCAR. FN Herstal SA v. Clyde Armory Inc., Case No. 15-14040 (11th Cir., Sept. 27, 2016) (Coogler, J, sitting by designation).

FN Herstal won a bid in 2004 to manufacture an assault rifle for the US Special Operations Command (USSOCOM) for use by various units of the US military. The prototype FN submitted to USSOCOM bore the trademark SCAR. Beginning in 2005, FN used the SCAR trademark to promote its rifle to law enforcement and civilians, exhibiting its SCAR rifle to thousands of attendees at gun shows across the United States and receiving substantial attention and publicity in industry publications in 2005 and 2006. While FN sold its SCAR rifle to the military beginning in 2004, FN did not sell the rifle to law enforcement or civilians until 2008.

During this time period, Clyde Armory began work on making replacement stock for certain rifles. Clyde Armory selected the name “SCAR-Stock” for its product in April 2006. At the time it chose to use the name SCAR-Stock, Clyde Armory was aware of FN’s SCAR rifle. Clyde Armory first sold its SCAR-Stock product in September 2006.

After the parties exchanged several demand letters, FN sued Clyde Armory for trademark infringement, and Clyde Armory counterclaimed. Because the parties had agreed that there was a likelihood of confusion, the district court only needed to decide which party had priority in its respective mark. After partial summary judgment and a bench trial, the district court ruled that FN had superior rights in its SCAR trademark.

The primary issues on appeal were whether FN had priority in its SCAR trademark and whether FN’s mark had become distinctive by the time Clyde Armory sold its SCAR-Stock product in 2006. The 11th Circuit found that substantial evidence demonstrated that FN had used the SCAR mark in commerce before Clyde Armory used its SCAR-Stock mark. Although FN did not sell its SCAR rifle to civilians until 2008, the Court found that FN had priority through analogous use in commerce—extensive promotional activities and publicity in 2005 and 2006 that caused the public to identify SCAR rifles with FN—in addition to FN’s significant sales to USSOCOM. Based on its millions of dollars of sales of SCAR rifles to the military, significant advertising and promotional efforts, extensive media coverage, and evidence that Clyde Armory intentionally copied FN’s SCAR mark, the Court held that FN’s SCAR mark had acquired secondary meaning and thus was protectable prior to Clyde Armory’s first use of its SCAR-Stock mark.

“Who’s on First?” Routine in Broadway Play Strikes Out as Transformative Fair Use

The US Court of Appeals for the Second Circuit determined that a Broadway play’s verbatim use of William “Bud” Abbott and Lou Costello’s “Who’s on First?” comedy routine was not a transformative fair use, but nonetheless affirmed the district court’s dismissal of the infringement claim because the plaintiffs could not establish that they owned a copyright for the routine. TCA Television Corp. v. McCollum, Case No. 16-134 (2d Cir., Oct. 11, 2016) (Raggi, J).

Abbott and Costello’s heirs sued the producers of the Broadway play “Hand to God” for copyright infringement over the unauthorized use of the iconic “Who’s on First?” comedy routine. The comedy skit consists of a conversation between Abbott and Costello featuring humorous misunderstandings that arise when Abbott announces a baseball team roster of players named “Who,” “What” and “I Don’t Know.” “Hand to God,” a dark comedy critiquing the social norms of a small, religious Southern town features a verbatim recital of the routine when the main character reenacts “Who’s on First?” to impress a girl.

The district court dismissed the infringement claim as a matter of law, finding that the play’s use of “Who’s on First?” was a transformative non-infringing fair use based largely on the fact that the purpose and character of the use (the first of four statutory factors for fair use) were vastly different from the humor of the appropriated routine. The Second Circuit, however, disagreed, stating that

the focus of inquiry is not simply on the new work, i.e., whether that work serves a purpose or conveys an overall expression, meaning, or message different from the copyrighted material it appropriates. Rather, the critical inquiry is whether the new work uses the copyrighted material itself for a purpose, or imbues it with a character, different from that for which it was created.

Thus, while the play itself differed from the “Who’s on First?” routine, the unaltered, verbatim use of the routine in the play was not transformative because it did not use the routine for a different purpose, nor did it add any new message, meaning or expression.

The Second Circuit also found that the other three statutory factors for fair use weighed in favor of the plaintiffs, namely, (1) the nature of the copyrighted work, (2) the amount and substantiality of the portion used as compared to the copyrighted work as a whole, and (3) the effect of the use on the market or value of the copyrighted work.

Although the Second Circuit found that the district court erred in finding the play’s use of “Who’s on First?” transformative, it nonetheless upheld the dismissal of the infringement claim for failure to plead a valid copyright. Defendants argued that the copyright for “Who’s on First?” fell into the public domain in 1968, but the plaintiffs argued ownership of a valid copyright based on theories of assignment, work-for-hire and merger, none of which the Court ultimately found sufficient to plead ownership of a valid copyright as a matter of law.

Termination of Distribution Agreement Does Not Affect Licenses to Cloud-Based Access

After finding that a copyright infringement question analyzed by the district court was more properly a contract interpretation issue, the US Court of Appeals for the Second Circuit affirmed the district court’s decision that termination of a distribution agreement did not require termination of the licenses granted under that agreement. Smith v. Barnesandnoble.com, LLC, Case No. 15-3508 (2d Cir., Oct. 6, 2016) (Jacobs, J).

Plaintiff Cheryl Smith is the widow of Louis Smith, who authored and copyrighted a book titled The Hardscrabble Zone, and in 2009 entered into a distribution agreement with an online ebook distributor, Smashwords, to market his book. The contract gave Smashwords “the right to distribute samples of the Work in any form of media” and stated that “[t]hese samples will be licensed for free, non-commercial use, duplication and sharing.” Smashwords subsequently offered the book for sale and sampling to its retail partners, including Barnes & Noble, which listed the book for sale on its website, bn.com, and made free samples available to customers.

While there were never any sales of The Hardscrabble Zone, one Barnes & Noble customer acquired a free digital sample of the book from bn.com. When a customer downloads a free sample using Barnes & Noble’s digital locker system, the content is stored in a cloud-based bookshelf associated with the customer’s digital locker account. Thus, when the customer downloaded the free sample of The Hardscrabble Zone, it was stored in that customer’s cloud-based bookshelf.

In 2011 Louis Smith terminated his agreement with Smashwords. The book was removed from bn.com, but because the customer had validly obtained the free sample prior to termination of the distribution agreement, the sample remained in the customer’s cloud-based bookshelf. Cheryl Smith alleged that this residual access to the book provided by Barnes & Noble infringed her late husband’s copyright.

The district court granted Barnes & Noble’s motion for summary judgment that the conduct at issue—i.e., allowing access to the legally downloaded free sample—did not amount to direct or contributory infringement. Cheryl Smith appealed.

On appeal, the Second Circuit affirmed but based its decision on an alternative ground. Instead of addressing the issue of infringement, the court found that Barnes & Noble’s conduct was authorized by contract. Specifically, the Court found that the distribution agreement allowed for distribution of samples with a license but no “provision to terminate the license for samples already distributed in the event the distribution agreement itself [wa]s terminated.”

The Second Circuit analogized the case to a customer who had obtained a free sample in a hard copy rather than an ebook under a distribution agreement. The customer would not have to return the hard copy in the event the distribution agreement was terminated. Similarly, if a customer purchased the ebook prior to termination of the distribution agreement, he or she would not be required to return the ebook once the contract was terminated. Thus, because the license to access the free sample was no more restrictive or limited than the license to access the book itself after purchase, and because there were no other contractual restrictions, the Court found that Barnes & Noble’s conduct was consistent with the terms of the distribution agreement.

Kristina M. DiBenedetto, an associate based in McDermott’s Washington, DC office, authored this article.

Not All Repeat Infringer Policies Are Sufficient for Safe Harbor Protection

The US Court of Appeals for the Second Circuit vacated a grant of summary judgment that a defendant had a reasonably implemented repeat infringer policy and therefore qualified for safe harbor protection under the Digital Millennium Copyright Act (DMCA) safe harbor provision. In doing so, the Second Circuit used a broader definition of “repeat infringer” than the district court. EMI Christian Music Grp., Inc., et al. v. MP3tunes, LLC, et al., Case No. 14-1048 (2d Cir., Oct. 25, 2016) (Lohier, J).

A group of record and music publishing companies filed a copyright infringement lawsuit against MP3tunes, alleging that MP3tunes, along with its websites MP3tunes.com, which primarily serves as a locker service for storing digital music, and sideload.com, which allows users to search for free music on the internet, infringed plaintiffs’ copyrights in thousands of sound recordings and musical compositions. Sideload.com also allows its users to upload music to their MP3tunes.com “locker,” which was also searchable.

The DMCA protects internet service providers from liability when users upload copyrighted content, while requiring that such service providers remove the material if they receive notice or otherwise become aware of the infringement. To qualify for the safe harbor protection, a service provider must have “adopted and reasonably implemented, and inform[ed] subscribers and account holders of the service provider’s system or network of, a policy that provides for the termination in appropriate circumstances of subscribers and account holders of the service provider’s system or network who are repeat infringers” (17 USC § 512), among other requirements.

In its grant of a partial summary judgment to the defendant, the district court found that MP3tunes had a reasonably implemented repeat infringer policy and therefore qualified for protection under the safe harbor provision. The district court further found that “a user who downloads or copies songs from third‐party sites for their personal entertainment could not be a ‘repeat infringer.’” Plaintiffs appealed.

The Second Circuit rejected the district court’s narrow definition of “repeat infringer,” concluding that “in the context of this case, all it takes to be a repeat infringer is to repeatedly upload or download copyrighted material for personal use.” Looking at the ordinary meaning of the term, the structure and context of the DMCA, and the legislative history, the Court determined that limiting the term “repeat infringer” to willful infringements is too narrow, and that a “repeat infringer” does not need to know of the infringing nature of its online activities or to upload rather than download content.