IP Update, Vol. 20, No. 2

Multiple Actors May Perform Steps in Method Claims for Purposes of Inducement

Addressing the issue of divided infringement, the US Court of Appeals for the Federal Circuit affirmed the district court’s finding of induced infringement even though no single actor performed all steps of the asserted claims in a method patent. Eli Lilly and Co. v. Teva Parenteral Medicines, Inc., Case No. 15-2067 (Fed. Cir., Jan. 12, 2017) (Prost, C.J.).

The patent at issue related to methods of administering the chemotherapy drug pemetrexed disodium (pemetrexed) after pretreatment with two common vitamins, folic acid and vitamin B12. Eli Lilly markets pemetrexed under the brand name ALIMTA^®. After the patent issued in 2010, Teva and other drug makers notified Eli Lilly that they had submitted Abbreviated New Drug Applications seeking approval by the US Food and Drug Administration to market generic versions of ALIMTA^®, and also filed Paragraph IV certifications declaring the patent invalid, unenforceable and not infringed. Eli Lilly brought suit against Teva and the other drug makers, alleging infringement under the Hatch-Waxman Act. The parties agreed that no single actor performed all steps of the asserted claims—rather, the steps were divided between physicians administering vitamin B12 and pemetrexed and patients administering folic acid.

During the litigation in 2013, the defendants conditionally conceded induced infringement under then-current law set forth in the Federal Circuit’s Akamai decision (IP Update, Vol. 15, No. 9) (Akamai II). The Supreme Court of the United States, however, reversed Akamai II, holding that liability for inducement cannot be found without direct infringement, and remanded to the Federal Circuit to reconsider the standards for direct infringement (IP Update, Vol. 17, No. 6). This resulted in the Federal Circuit’s Akamai V decision in 2015 (IP Update, Vol. 18, No. 12). After applying Akamai V, which broadened the circumstances in which others’ acts may be attributed to a single actor to support direct infringement liability in cases of divided infringement, the district court found that defendants still induced infringement. Defendants appealed. Defendants also appealed the district court’s finding that the asserted claims were not invalid.

The Federal Circuit affirmed, stating that under Akamai V, the performance of method steps is attributable to a single entity in two circumstances: (1) when that entity “directs or controls” others’ performance, or (2) when the actors “form a joint enterprise.” In the instant case, the question was whether physicians directed or controlled their patients’ administration of folic acid. As to that question, the Court reiterated the two-prong test set forth in Akamai V, where directing or controlling others’ performance includes circumstances in which an actor conditions participation in an activity or receipt of a benefit upon others’ performance of one or more steps of a patented method, and establishes the manner or timing of that performance. The Court also noted that going forward, “other factual scenarios may arise which warrant attributing others’ performance of method steps to a single actor.”

Regarding the first prong, the Federal Circuit, after considering the product labeling and expert testimony, agreed with the district court’s finding that physicians condition pemetrexed treatment on folic acid pretreatment. The Court noted that for purposes of applying the test, “conditioning” was not limited to “legal obligations or technological prerequisites.” Regarding the second prong, the Federal Circuit again agreed with the district court’s ruling that, in view of the record evidence, physicians establish the manner and timing of patients’ folic acid pretreatment. The Court cautioned, however, that its holding “does not assume that patient action is attributable to a prescribing physician solely because they have a physician-patient relationship,” and stated that it “leave[s] to another day what other scenarios also satisfy the ‘direction or control’ requirement.” Turning next to the issue of whether Eli Lilly proved the requisite intent to find liability for induced infringement, the Federal Circuit found that the evidence established that the product labeling in issue would inevitably lead some physicians to infringe which was sufficient to establish the requisite intent for inducement.

General “Desire” to Improve Can Provide Sufficient Rationale to Combine References

Pointing to the “normal desire” of scientists to improve what is already known as a rationale to combine, the US Court of Appeals for the Federal Circuit affirmed the Patent Trial and Appeal Board’s (PTAB’s) inter partes reexamination decision finding Ethicon’s claims obvious over a combination of three prior art references. In re Ethicon, Inc., Case No. 15-1696 (Fed. Cir., Jan. 3, 2017) (Lourie, J) (Newman, J., dissenting).

Ethicon’s patents are directed to drug-eluting stents coated with a co-polymer made from two polymers, VDF and HFP, at an 85:15 percent weight ratio. In contrast to polymer-coated stents in the prior art, stents with the claimed co-polymer coating help prevent blood vessels from closing after implantation.

The PTAB concluded that the claims were obvious over the Tuch, Tu and Lo references, finding that (1) Tuch teaches stents coated with VDF alone, and teaches that coatings with low elasticity cause problems; (2) Tu teaches that VDF:HFP co-polymers have good elasticity, but does not teach the claimed ratio; and (3) Lo teaches that VDF:HFP co-polymers at the claimed 85:15 percent ratio provide good elasticity for non-biomedical, industrial applications. Ethicon appealed.

The Federal Circuit affirmed, concluding that “the claimed invention is merely the simple substitution of a coating (VDF:HFP) known to be useful in in vivo applications, including stents, in a weight ratio (85:15) known to provide a good balance between strength and elasticity, for the VDF coating disclosed in Tuch.”

Ethicon argued that there was no motivation to combine the three references, but the Federal Circuit relied on KSR in explaining that a specific teaching, suggestion or motivation to combine was not required. Instead, “[t]he normal desire of artisans to improve upon what is already generally known can provide the motivation to optimize variables such as the percentage of a known polymer for use in a known device.”

The Federal Circuit also rejected Ethicon’s argument that Tuch teaches away from use of non-bioabsorbable (BA) coatings such as VDF:HFP, finding instead that Tuch teaches both BA and non-BA coatings, and that BA is preferred. As the Court explained, there can be no teaching away absent “clear discouragement.” Nor was the Court persuaded by Ethicon’s argument that Tu relates to non-stent devices and thus teaches away from allowing a polymer like VDF:HFP to contact blood. Rather, the Court found that the teachings cited by Ethicon were clearly limited to one specific embodiment, and when read as a whole, Tu’s invention is broadly applicable to biomedical devices that come into contact with blood.

The Federal Circuit also rejected Ethicon’s argument that Lo concerns very old, non-analogous art that has nothing to do with medical devices. Citing the PTAB’s reliance on Lo’s teachings regarding properties of VDF:HFP co-polymers, the Court found substantial evidence that Lo is “reasonably pertinent” to the problem that the inventors were addressing. The Court further noted that the “mere age” of a reference is not persuasive evidence of non-obviousness absent concrete evidence of a long-felt need or failure of others.

The Federal Circuit gave little weight to Ethicon’s objective indicia of non-obviousness, finding “scant support in the record” and “conclusory” expert testimony concerning copying, commercial success, industry praise and unexpected results. The Court also concluded that Ethicon did not provide substantial evidence showing a nexus between the objective indicia and the VDF:HFP 85:15 coating.

Judge Newman, in dissent, characterized the obviousness analysis as pure hindsight and noted that an invention is not obvious simply because its component parts were “independently known in the prior art.” She concluded that the PTAB erred by “collecting the elements of the . . . Patent’s stent from assorted sources, and placing them in the template of the ’844 claim. The only guide to this reconstruction is the . . . Patent itself.” Judge Newman also noted that “[t]he Tu devices are different products requiring different properties for different purposes.” Indeed, Tu does not even mention stents, and the polymers in Tu must be cured at extremely high temperatures that far exceed the temperature ceiling described in the Ethicon patent.

“Visually Negligible” Is Not Indefinite

The US Court of Appeals for the Federal Circuit reversed the district court’s decision that the claim term “visually negligible” was indefinite because the specification provided examples of visually negligible indicators, and concluded that neither the examiners nor the experts during prosecution and reexamination had apparent difficulty determining the scope of this term. Sonix Technology Co., Ltd. v. Publications International, Ltd., Case No. 16-1449 (Fed. Cir., Jan. 5, 2017) (Lourie, J.).

The patent at issue describes a system and method for using a “graphical indicator” to encode information on the surface of an object. The inventor recognized that encoding information on the surface of an object is not new. For example, the patent describes a bar code as a conventional example of a graphical indicator. However, the patent purports to improve on conventional methods by rendering the graphical indicator visually negligible. Specifically, the graphical indictor can be a unique matrix of micro-unit dots, where the dots are so small that human eyes cannot differentiate one graphical indicator from others. The patent describes the micro-units as preferably being small enough that only a microscope can detect them, and includes two examples of such visually negligible indicators.

After two reexamination proceedings confirmed that the patent was not invalid in light of the cited prior art, the plaintiff filed suit against the defendant. Subsequent to the district court’s claim construction ruling and after expert reports were submitted, the plaintiff’s expert was asked, during his deposition, what “visually negligible” meant to him. He explained that he understood it to mean that “if these dot patterns are imprinted on a surface, with a cursory look, I will not notice” them. The expert went on to explain that there “is not a universal standard by any means because it depends on the visual acuity of the observer.” Based on this testimony, the district court granted summary judgment that the term “visually negligible” was indefinite and entered a judgment of invalidity. Sonix appealed.

Citing to the Supreme Court of the United States’ 2014 Nautilus decision (IP Update, Vol. 17, No. 6), the Federal Circuit explained that in order to survive an indefiniteness challenge, a claim “viewed in light of the specification and prosecution history, [must only] inform those skilled in the art about the scope of the invention with reasonable certainty,” and that the challenger must prove indefiniteness by clear and convincing evidence. The Court agreed with the plaintiff that a skilled artisan would understand, with reasonable certainty, what it means for an indicator in the claimed invention to be visually negligible.

The Federal Circuit found that the challenged term was not “purely subjective” because there is an objective baseline to determine what is visually negligible based on what can be seen by the normal human eye. The Court also relied on the fact that the patent specification provided two examples of visually negligible indicators. Finally, the Court observed that no one involved in either of the reexamination proceedings had any apparent difficulty in determining the scope of the term. Based on these facts, the Federal Circuit found that the term was not indefinite and reversed the district court’s summary judgment decision.

Finally, the Federal Circuit noted that the holding in this case does not mean that the existence of examples within the specification will always render a claim definite, or that listing requirements will always provide sufficient clarity. In addition, the fact that an expert applied a contested claim term without difficulty does not render a claim immune from indefiniteness challenge, the Court noted. These factors should be considered in determining whether a claim term is indefinite, however.

Preliminary Injunction Maintained Despite Adverse Decision in Parallel Post-Grant Review

Addressing the merits of an injunction in a case where the district court and the Patent Trial and Appeal Board (PTAB) disagreed as to the validity of a patent in parallel proceedings, the US Court of Appeals for the Federal Circuit affirmed the preliminary injunction by citing to the different standards applied by each forum. Tinnus Enterprises, LLC, Zuru LTD v. Telebrands Corporation, Bed Bath & Beyond, Inc., Case No. 16-1410 (Fed. Cir., Jan. 24, 2017) (Stoll, J).

Tinnus produces the “Bunch O Balloons” toy for filling water balloons and owns a patent covering the toy. Telebrands sells a competing “Balloon Bonanza” product. Both products attach to a hose in order to simultaneously fill multiple water balloons. Tinnus sued Telebrands and Bed Bath & Beyond (collectively, Telebrands) for patent infringement and moved for a preliminary injunction. The magistrate judge issued a report and recommendation (R&R) recommending the injunction, which the district court entered. Telebrands appealed. At about the same time, the PTAB instituted a post-grant review (PGR) requested by Telebrands. Telebrands did not move for a stay pending the PTAB decision, so the litigation and the PGR proceeded concurrently. In a final written decision, the PTAB found all of the claims invalid as indefinite.

Telebrands appealed the district court’s conclusions with respect to the likelihood of success on the merits and irreparable harm. Because Telebrands failed to object to the R&R’s indefiniteness determination, that determination was reviewed under a plain error standard, rather than the abuse of discretion usually applied on appeal. The Federal Circuit found no plain error in the district court’s indefiniteness analysis, despite the contrary finding by the PTAB. In this case, the difference in result can be attributed to the different standards used to evaluate indefiniteness in district court and the PTAB. In a PGR proceeding, indefiniteness is evaluated under the Packard test, while in district court, indefiniteness is evaluated under the Supreme Court of the United States’ Nautilus standard. The difference is that the Packard test sets a threshold for indefiniteness when a claim contains words or phrases whose meaning is unclear and demands at least as much clarity, and potentially more, than Nautilus’s reasonable certainty requirement.

Telebrands also faulted the district court for its purported failure to construe several terms. However, the Federal Circuit noted that the R&R adopted by the district court acknowledged the parties’ disagreement with respect to construction of certain claim terms, but concluded that Tinnus was likely to succeed regardless of those terms’ interpretation. Telebrands also argued that each claim limitation must be found in the accused product itself and that reliance on an instruction manual to show one of the claimed features was clear error. The Federal Circuit again disagreed, explaining that a patentee is entitled to rely on circumstantial evidence such as instruction manuals to establish infringement.

Telebrands next argued that it was clear error for the magistrate judge to rely on evidence pre-dating patent issuance in support of its irreparable harm finding. The Federal Circuit disagreed, finding that the pre-issuance evidence demonstrated the possibility of identical harm post-issuance. Moreover, the Court found that the record also contained sufficient post-issuance evidence to support the district court’s finding of irreparable harm.

Practice Note: Depending on the applicable circuit law, and at least in the Fifth Circuit, practitioners should adequately object to a magistrate judge’s report and recommendation in order to avoid the more deferential plain error standard of review on appeal.

Wrong Inventor Defense Fails in Pharmaceutical Litigation

Addressing derivation and obviousness issues, the US Court of Appeals for the Federal Circuit affirmed the district court’s denial of a generic drug manufacturer’s attempt to invalidate a patent based on the theory that the claimed invention was the result of an exchange with the US Food and Drug Administration (FDA) during the drug’s approval process, rather than the named inventor’s idea. Cumberland Pharms. Inc. v. Mylan Institutional LLC, Case No. 16-1155 (Fed. Cir., Jan. 26, 2017) (Taranto, J.).

The case relates to a formulation for the medication acetylcysteine, sold by Cumberland under the brand name Acetadote^® as an intravenous antidote for acetaminophen poisoning. The relevant claims cover a stable formulation of acetylcysteine that is “free of chelating agents.” Chelating agents are preservative chemicals that bind to heavy metal ions that would otherwise cause the degradation of the acetylcysteine, interfering with its stability and shelf life.

Mylan filed an application with the FDA to market a generic acetylcysteine product, and argued that patents covering the chelating-agent-free formulation were invalid under § 102(f) and § 103. Mylan’s invalidity theory was based on the fact that Cumberland’s Acetadote^® formulation originally included the chelating agent EDTA, but the FDA asked Cumberland to justify the inclusion of EDTA during the regulatory approval process. Cumberland responded that it included the EDTA as a preservative, and also proposed a stability study comparing the original formulation to those with less or no EDTA. The FDA agreed with the proposal and requested that Cumberland perform the stability study, which ultimately showed that, under certain preparation conditions, acetylcysteine would remain stable without the inclusion of EDTA. Mylan argued that because the direction to perform the study came from the FDA, the invention was either derived from the FDA under § 102(f) or obvious.

Both the district court and the Federal Circuit disagreed. The Federal Circuit affirmed the district court’s ruling that the patent was not invalid under either § 102(f) or § 103. With respect to § 102(f), the Court noted that derivation would have required the FDA to have conceived of the invention and all its claim limitations and then have communicated that to Cumberland. As the Court explained, the mere direction to perform a study did not meet this standard, particularly in light of the evidence showing that a Cumberland scientist initially conceived of the study. The Court also found that the FDA’s guidance regarding the EDTA-free study did not render an EDTA-free formulation obvious, even in light of another reference that was silent as to the presence of EDTA. The Court focused on the fact that, even though the prior art suggested EDTA-free formulations, there was no reasonable expectation that the formulations would be “stable,” as required by the claims, because the prevailing view in the art at the time was that chelating agents were required for stability.

Remand to District Court to Attempt to Identify “Article of Manufacture” for Design Patent Damages

Addressing the design patent battle between Apple and Samsung on remand from the Supreme Court of the United States, the US Court of Appeals for the Federal Circuit declined to apply the new standard or to order specific action by the district court. Instead, in a non-precedential decision, it simply remanded the damages dispute to the district court for analysis. Apple Inc. v. Samsung Elecs. Co., et al., Case Nos. 14-1335, 15-1029 (Fed. Cir., Feb. 7, 2017) (per curiam) (non-precedential).

This case returned to the Federal Circuit after the Supreme Court held in favor of Samsung that the relevant “article of manufacture” for design patent damages can be a component of the product as sold (IP Update, Vol. 19, No. 12). By statute, design patent damages must be the “total profits” of the infringing article of manufacture, and the Federal Circuit had previously rejected Samsung’s argument that design patent damages must be apportioned to those profits causally attributable to the infringement (IP Update, Vol. 18, No. 6). Samsung dropped the later argument at the Supreme Court in favor of attack over what constitutes the article of manufacture. The Supreme Court set forth a two-part inquiry that involves first identifying the article to which the infringing design has been applied, then calculating the profit on that identified article. But the Supreme Court declined to identify the article upon which damages should be predicated in this case.

On remand, Apple attempted to preserve its favorable damages record by arguing that the Federal Circuit should be the court to identify the article of manufacture for a damages calculation. Samsung argued that the Federal Circuit should remand to the district court with express orders to conduct another damages trial based on the Supreme Court’s new standard. The Federal Circuit rejected both options and instead simply remanded the case with instructions that the district court should decide the issues in the first instance, which the Court said could include the opportunity to set forth a test for identifying the relevant article of manufacture for design patent damages or to conduct a new trial on damages with detailed jury instructions based on the Supreme Court ruling.

Electronic Trading Claims Are Patent Eligible

The US Court of Appeals for the Federal Circuit affirmed a district court’s holding that claims directed to electronic trading are patent eligible. Trading Tech. Int’l, Inc. v. CQG, Inc., Case No. 16-1616 (Fed. Cir., Jan. 18, 2017) (Newman, J.) (non-precedential).

Trading Technologies charged CQG with infringement of patents directed to the electronic trading of stocks, bonds, futures, options and similar products. The patents describe a trading system in which a graphical user interface displays the market depth of a traded commodity. CQG moved for judgment as a matter of law, asserting that the claims of the patents were directed to patent-ineligible subject matter under 35 USC § 101. The district court denied CQG’s motion after finding that the claims were not directed to an abstract idea and that they recited an inventive concept. CQG appealed.

On appeal, the Federal Circuit affirmed the district court’s patent-eligibility holding. Judge Newman, writing for the panel, evaluated the district court’s application of the two-step Alice framework. First, the Court affirmed the district court’s analysis and conclusion under Alice step 1. With respect to step 1, the district court found the patent claims to be directed to improvements in existing graphical user interface devices, rather than being directed more generally to a mathematical algorithm or a business practice. The Court agreed and emphasized that the graphical user interface system of these patents is not an idea that has long existed, calling that “the threshold criterion of an abstract idea and ineligible concept.”

The Court also affirmed the district court’s analysis and conclusion under Alice step 2. According to the district court, the challenged claims recite an inventive concept that allows traders to more efficiently and accurately place trades using the claimed electronic trading system. The Court found the district court’s analysis to be in accord with precedent, including the Federal Circuit’s decisions in DDR Holdings, McRO and Enfish.

Not Intuitively Obvious: Federal Circuit Remands for Explicit Rational to Combine

In a rebuke of the Patent Trial and Appeal Board’s (PTAB’s) obviousness analysis, the US Court of Appeals for the Federal Circuit vacated and remanded a PTAB obviousness determination, explaining that the PTAB failed to explicitly articulate a reason why it would have been obvious to combine the prior art references. In re Van Os, Case No. 15-1975 (Fed. Cir., Jan. 3, 2017) (Moore, J.) (Newman, J., concurring in part, dissenting in part). This decision follows on another recent decision where the Federal Circuit remanded a case to the PTAB because it found that the PTAB failed to articulate reasons why one of skill in the art would be motivated to combine the prior art references (In re NuVasive) (IP Update, Vol. 20, No. 1).

The patent application at issue relates to a graphical user interface that allows a user to rearrange the displaced icons in response to specific types of “touches” and after entering into a specific type of “interface reconfiguration mode.” During the pendency of the application, the examiner finally rejected various claims, and the inventors appealed those rejections to the PTAB. The PTAB reversed most of the examiners’ rejections but affirmed the obviousness rejection as to four claims. Without discussion, the PTAB found that the combination of two prior art references would have been “intuitive” and that the claims were therefore obvious. The inventors appealed.

The Federal Circuit vacated and remanded the case back to the PTAB, explaining that the PTAB’s analysis lacked explicit factual underpinnings to provide support for its obviousness determination, and that a mere statement that a particular combination would have been “intuitive” was no more proper than merely stating that the “combination would have been obvious.” The Court reminded the PTAB that a factual record with explicit reasons was necessary for the appellate review of whether an obviousness determination is supported by substantial evidence.

Concurring in part, Judge Newman agreed that the PTAB’s obviousness analysis was insufficient. She wrote separately to suggest that while remand may be appropriate in post-grant review proceedings where the PTAB is the trier of fact, a reversal is required when the appeal is made from a final rejection in an examination. Judge Newman would have found that that where, as here, the PTAB fails to meet its burden to prove unpatentability, the patent should be granted without remand.

Article III Injury-in-Fact Required to Appeal PTAB Final Written Decision in IPR

Addressing the legal standard for demonstrating standing in an appeal from a final agency decision, the US Court of Appeals for the Federal Circuit concluded that petitioners must have Article III standing to appeal a Patent Trial and Appeal Board (PTAB) decision. Phigenix, Inc., v. Immunogen, Inc., Case No. 16-1544 (Fed. Cir., Jan. 9, 2017) (Wallach, J.).

Genentech had an exclusive license to practice an ImmunoGen patent, which it uses to produce Kadcyla^®, a cancer-treatment drug. Phigenix claimed to have a patent that covers essentially the same subject matter as claimed in the ImmunoGen patent. Phigenix filed an inter partes review (IPR) with respect to the ImmunoGen patent, the validity of which was upheld. Phigenix then appealed to the Federal Circuit, and Immunogen filed a motion to dismiss for lack of standing.

Citing Spokeo, the Court reiterated that to have Article III standing, the appellant “must have (1) suffered an injury-in-fact, (2) that is fairly traceable to the challenged conduct of the [appellee], (3) that is likely to be redressed by a favorable judicial decision.” Although Article III standing is not necessarily a requirement to appear before an administrative agency (such as the PTAB in an IPR proceeding), “an appellant must nevertheless supply the requisite proof of an injury-in-fact when it seeks review of an agency’s final action in a federal court.”

To that end, the Federal Circuit set forth the legal standard for demonstrating standing in an appeal from a final agency action, addressing (1) burden of production, (2) requisite evidence to meet that burden, and (3) when evidence must be produced. First, the Court stated that the burden of production standard at summary judgment applies in the present scenario. Second, an appellant “must either identify . . . record evidence sufficient to support its standing to seek review or, if there is none because standing was not an issue before the agency, submit additional evidence to the court of appeals,” such as “by affidavit or other evidence.” Third, the appellant must identify the relevant evidence demonstrating its standing “at the first appropriate” time and at the earliest possible opportunity, whether in response to a motion to dismiss or in the opening brief.

Phigenix submitted evidence that it believed demonstrated standing. However, none of those documents even suggested that it faced a risk of infringing the ImmunoGen patent, that it was an actual or prospective licensee of the patent, that it had suffered an actual economic injury because the patent increased competition between itself and ImmunoGen, or that it otherwise planned to take any action that would implicate the patent. Moreover, the supporting declaration and attorney letter were found to be insufficient to demonstrate an injury-in-fact because they lacked supporting facts. As the Federal Circuit made clear, conclusory statements in the declaration and letter as to the hypothetical licensing injury did not satisfy standing requirements.

Finally, Phigenix argued that “the estoppel effect of the [PTAB]’s decision adversely impacts Phigenix’s ability to provide a contractual warranty” because 35 USC §315(e) precludes a petitioner in an IPR that results in a final written decision from asserting that the claim is invalid on any ground that the petitioner raised or reasonably could have raised during the IPR. Relying on Consumer Watchdog (IP Update, Vol. 17, No. 7), the Federal Circuit explained that an estoppel provision is not an injury-in-fact. The Court therefore dismissed Phigenix’s appeal.

Practice Note: In addition to collecting facts supporting injury-in-fact for standing purposes, companies that are neither involved in an infringement action nor threatened with one should take into account their limited appeal opportunities as well as the estoppel effect under 35 USC § 315(e) before filing an IPR.

Patent Owner and Counsel to Pay Double Costs for Frivolous Appeal

Addressing the issue of sanctions for continued litigation after the parties settled all claims, the US Court of Appeals for the Federal Circuit affirmed a district court’s award of attorneys’ fees and costs, and granted further sanctions for vexatious conduct by the patent owner. Walker v. Health International Corp., Case No. 15-1676 (Fed. Cir., Jan. 6, 2017) (Reyna, J.).

Andre Walker sued multiple defendants for infringing a patent related to a device for exercising abdominal muscles. Eventually, only Health International (HSN) remained in the case. Walker and HSN agreed to mediation and reached a settlement agreement requiring HSN to pay Walker $200,000. After entering into the agreement, Walker persisted in filing motions and sought discovery. The parties continued to litigate the case through a series of motions over the next several weeks before Walker executed a general release of all claims against HSN. HSN forwarded payment the same day.

Soon after the payment was received, Walker filed a motion requesting that attorneys’ fees be denied and the case be dismissed with the district court retaining jurisdiction over the agreement. HSN filed a motion for sanctions based on Walker’s meritless filings that forced HSN to continue to litigate and waste resources on a matter that had been fully resolved. The district court dismissed all claims, awarding HSN more than $20,000 in attorneys’ fees and costs resulting from Walker’s vexatious litigation conduct after entering into the agreement. Walker appealed.

Walker first argued that the district court erred in awarding fees without “findings of bad faith.” The Federal Circuit disagreed, finding that Walker’s argument “mischaracterize[d] clear authority.” The Court pointed out that federal courts may award damages under their equitable powers when litigants have acted “in bad faith, vexatiously, wantonly, or for oppressive reasons.” The Court found ample support in the record for the district court’s conclusion of vexatiousness.

Walker next argued that the fee award was improper because he was the “prevailing party” in the infringement suit. The Federal Circuit noted that the Supreme Court of the United States rejected the so-called “catalyst theory” of attorneys’ fee recovery on which Walker relied. Because Walker continued to assert his frivolous argument and raise new misconduct accusations against opposing counsel, the Court found Walker “bent to mischaracterize clear authority and draw illogical conclusions from law and facts.” The Court was particularly troubled by Walker’s baseless assertions of misconduct against his opposing counsel and continued misrepresentation of clear, binding Supreme Court precedent even after the distortion was pointed out by opposing counsel: “[t]he continued misrepresentation standing alone is a very serious matter that could warrant sanctions.”

The Federal Circuit remarked that “attempts to mislead the court in a frivolous appeal further compound the wasted resources because the court and opposition are forced to devote extra resources to sorting through half-truths and misused legal authority in an appeal that never should have been filed in the first place.” The Court granted HSN’s motion for sanctions and determined that Walker and his lawyer were jointly liable for an award of more than $51,000, finding the “attorney who wrote and signed the briefs to be equally responsible.”

Copyright Date Alone Does Not Prove Public Accessibility of Software User Guide

Addressing the standard for establishing whether a prior art reference qualifies as a “printed publication,” the Patent Trial and Appeal Board (PTAB) denied institution of inter partes review (IPR), finding that the petitioner failed to make a threshold showing that its asserted references were prior art printed publications. Microsoft Corp. v. Corel Software, LLC, Case No. IPR2016-01300 (PTAB, Jan. 4, 2016) (Tartal, APJ).

Microsoft filed an IPR petition with respect to a patent directed to providing a real-time preview of the impact of user commands on a document being edited. Microsoft argued that the claims were obvious over various combinations of references, including software manuals for QuarkXPress and IRIS. Microsoft argued that the copyright dates in the two manuals sufficiently established the manuals as “printed publications.” Corel, the patent owner, argued that Microsoft failed to establish that either manual was publicly available as of its respective copyright date. The PTAB agreed with Corel.

With respect to the QuarkXPress manual, the PTAB concluded that the copyright notice in the manual, while possibly evidencing the date of the reference, “sheds virtually no light on whether the document was publicly accessible as of that date.” Moreover, the PTAB found that the copyright notice included a limitation on the use and distribution of the manual, which “suggests that if it was distributed at all, it was only in a restricted and limited fashion.” Microsoft attempted to offer a catalog listing of the manual as evidence of its public accessibility. The PTAB, noting that that the catalog itself had a copyright date after the critical date and seemed to refer to a different version of the QuarkXPress manual, was not persuaded. The PTAB thus concluded that Microsoft failed to establish a threshold showing of public accessibility of QuarkXPress as of the critical date.

Regarding the IRIS manual, the PTAB noted that this manual listed multiple copyright dates, including dates before and after the critical date: “Petitioner has not shown that IRIS has a copyright date of 1996 in light of the conflicting copyright dates as of 2009–2015 also appearing in IRIS.” Microsoft once again attempted to offer a catalog listing of the reference as evidence of the asserted publication date; however, the PTAB agreed with the patent owner that the listing showed “nothing more than a 2016 copy of the same page of IRIS bearing a 1996 copyright date.” Again the PTAB concluded that Microsoft failed to support a threshold showing of public accessibility of IRIS, and denied institution of IPR.

Practice Note: Petitioners must present their best possible evidence and arguments for instituting IPR in the petition itself. Here, the PTAB denied Microsoft’s request to submit a reply brief with additional evidence, which prevented petitioner from addressing the weaknesses in its petition.

Secondary Considerations of Non-Obviousness Cap on Obviousness Showing

In a rare case where secondary considerations of non-obviousness carried the day, the Patent Trial and Appeal Board (PTAB) concluded that even though the petitioner made a sufficient obviousness showing, the patent owner’s evidence of secondary considerations was sufficiently compelling to overcome such a showing. World Bottling Cap, LLC v. Crown Packaging Technology, Inc., Case No. IPR2015-01651 (PTAB, Jan. 19, 2017) (Saindon, APJ).

The patent at issue is directed to a specific type of bottle cap, called a crown cap, used for glass beer or soda bottles. Crown caps have been around for more than a century but, according to the patent, Crown Packaging’s cap was unique because it was made with thinner and harder steel than conventional caps.

World Bottling Cap argued that the patent was obvious over a combination of two prior art references. According to the petitioner, the first reference taught the overall process of forming a bottle cap, and the second reference taught the desirability of a steel bottle cap having the hardness of steel recited in the claims. In response, the patent owner argued that the two references could not be combined because the hard steel of the second reference would not work in the process of the first prior art reference. The PTAB disagreed with the patent owner and found the second reference’s teachings sufficient to lead one of ordinary skill in the art to the claimed bottle cap, even if there would have been some associated disadvantages.

The PTAB then examined the patent owner’s evidence of secondary considerations of non-obviousness, including evidence of commercial success, industry praise and copying by others. As for the specific evidence of non-obviousness, the patent owner submitted information of an increase in market share upon introduction of the new bottle cap, despite increasing international competition. Specifically, the PTAB credited evidence of increased market share in Peru (where there was no patent barrier) as significant. The PTAB credited the patent owner’s evidence, particularly because the petitioner’s rebuttal arguments had no evidentiary support and because the patent owner’s evidence had a strong nexus to the claimed invention. Regarding industry praise, the PTAB found that the industry had long been attempting to make thinner, harder bottle caps, but could not overcome technical limitations that reduced pressure performance.

In support of its decision, the PTAB observed that “[a]lthough we do not find the argument that ‘if it were so obvious, someone would have done it by now’ persuasive as a matter of course, in the presence of certain additional facts, it can be a useful (but not sufficient) indicator of nonobviousness.”

Sovereign Immunity Can Shield State University Research Foundations in PTAB Proceedings

Addressing the application of the sovereign immunity defense under the 11th Amendment in the inter partes review (IPR) context, the Patent Trial and Appeal Board (PTAB) dismissed three IPR petitions, finding that the sovereign immunity defense is applicable to a research foundation of a state university, and that the foundation had not waived its sovereign immunity because it had not asserted the challenged patent in district court or sought a declaratory judgment of validity. Covidien LP v. University of Florida Research Foundation, Inc., Case No. IPR2016-01274; -01275; -01276 (PTAB, Jan. 25, 2017) (Ippolito, APJ).

University of Florida Research Foundation (UFRF), the patent owner, filed a breach of contract action in Florida state court against petitioner concerning a patent license. In response, the petitioner filed a counterclaim seeking declaratory judgment that it did not infringe the licensed patent, and successfully removed the suit to federal district court. The petitioner then filed three IPR petitions against the patent at issue. Following removal, UFRF argued that it was an arm of the State of Florida through the University of Florida and, as such, was entitled to 11th Amendment immunity from petitioner’s declaratory judgment counterclaim. The district court agreed with UFRF, remanding the action back to state court. The petitioner appealed to the US Court of Appeals for the Federal Circuit. UFRF was also granted permission to file a motion to dismiss the IPR petitions based on its sovereign immunity under the 11th Amendment.

Examining the language of the 11th Amendment—“Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State”—the PTAB noted that the Supreme Court of the United States has interpreted the amendment broadly to limit not only the judicial authority of the federal courts, but also to preclude certain administrative bodies from adjudicating complaints filed by a private party against a non-consenting state. In granting dismissal, the PTAB looked to the Supreme Court’s 2002 analysis in Federal Maritime Commission v. South Carolina State Ports Authority.

In Federal Maritime Commission, a cruise ship company filed a complaint against the South Carolina State Ports Authority (SCSPA) with the Federal Maritime Commission, seeking damages and injunctive relief from repeated denials of requests for permission to berth a cruise ship. The PTAB observed that the US Court of Appeals for the Fourth Circuit, in reviewing the nature of the procedures employed by the Commission, determined that “the Commission’s proceeding walks, talks, and squawks very much like a lawsuit and . . . its placement within the Executive Branch cannot blind us to the fact that the proceeding is truly an adjudication.” The PTAB also noted that, in reviewing the Fourth Circuit decision, the Supreme Court recognized that “the similarities between the Commission’s proceedings and civil litigation were ‘overwhelming.’” The PTAB also cited the 2007 Federal Circuit decision in Vas-Cath, applying the Federal Maritime Commission case to US Patent and Trademark Office (PTO) interference proceedings and recognizing that “[l]ike proceedings in the Federal Maritime Commission, contested interference proceedings in the PTO bear ‘strong similarities’ to civil litigation.”

After concluding that the patent owner was indeed an arm of the State of Florida, the PTAB examined the waiver issue and concluded that no waiver applied to the present case, as the patent owner had not asserted the challenged patent against the petitioner and had not sought a declaratory judgment of validity.

Practice Note: The patent owner in this situation had not asserted the challenged patent against the petitioner but rather had filed a breach of contract action over a license to the patent and also sought a declaratory judgment for an accounting under the license. Thus, as both the PTAB and the district court found, the patent owner had never consented to a waiver of its sovereign immunity.

Design Patent Survives AIA Review

In a rare inter partes review (IPR) decision involving a challenge to a design patent, the Patent Trial and Appeal Board (PTAB) issued a final decision finding that the petitioner had not shown that a sole claim of a design patent, in this case directed to insulation having a cloud-like appearance with a swirl pattern including colors and a variety of hues, is unpatentable. Johns Manville Corporation, et al. v. Knauf Insulation, Inc., et al., Case No. IPR2015-01453 (PTAB, Jan. 11, 2017) (Daniels, APJ).

Johns Manville Corporation filed a petition to institute an IPR of a design patent directed to the appearance of mineral fiber insulation. In its petition, Manville relied on several articles and advertisements depicting insulation that it asserted anticipated or at least rendered the claimed design obvious. After institution, Knauf Insulation, the patent owner, argued that the declarations Manville submitted to support the prior art status of the articles and advertisements did not evidence personal knowledge of the prior art status of the documents (which were therefore not properly authenticated). Knauf also argued distinctions between the claimed design and the designs depicted in the articles and advertisements.

The PTAB started from the well-settled premise that a design is represented better by an illustration than a description. Citing Egyptian Goddess, the PTAB noted that “[a]lthough preferably a design patent claim is not construed by providing a detailed verbal description, it may be ‘helpful to point out . . . various features of the claimed design as they relate to the . . . prior art.’” In that regard, in its institution decision, the PTAB determined that the claimed design includes the features shown in the sole figure of the patent and “that color is an element of the claimed design; this element includes colors that sufficiently impart or convey a variation of distinct hues, but is not limited to ‘brown and cream.’” The PTAB noted, however, that the figure (depicting “material having a cloud-like appearance with variations in a swirl pattern”) lacks clear structure, form and environment, and the PTAB provided a verbal claim construction to compare the claimed design to the prior art. The PTAB further explained that specific colors and hues cannot be precisely articulated in a verbal claim construction (“a single color can be described by a variety of names, and a variety of colors can be described by a single name”), and thus, the claimed design was interpreted as including colors (not limited to brown and cream) and a “variation of distinct hues” as shown in the sole figure of the patent.

The PTAB agreed with Manville that the articles and advertisements it relied on qualified as prior art. However, the PTAB agreed with Knauf that an “ordinary observer” would not have found the patented design to have been anticipated by the prior art pink-colored insulation depicted in the primary reference relied on by Manville.

In terms of obviousness, the PTAB looked to the “designer of ordinary skill” and the two-step analysis comprising (1) an evaluation of the primary reference in terms of its design characteristics that are the same as the claimed design, then (2) a determination whether it would have been obvious to a designer of ordinary skill to have modified the primary reference by a secondary reference to create a design having the same overall appearance as the claimed design. After considering various possible combinations of primary and secondary references, the PTAB concluded that the prior art, while depicting a similar fiber insulation pattern as the claimed design, did not show “the swirling variation in distinct colors, or hues, including brown and cream” of the Knauf patent. The PTAB therefore concluded that Manville failed to show by a preponderance of the evidence that the claimed design would have been obvious, because a designer of skill, viewing the prior art from the vantage of the “ordinary observer,” would not have combined references to create the claimed combination of “brown, chocolate, coffee, beige or almond.”

TTAB Serves It Straight Up: TEQUILA Is Not Generic

Addressing whether the word “tequila” can be registered in the United States as a certification mark, the Trademark Trial and Appeal Board (TTAB) answered in the affirmative, dismissing an opposition alleging that “tequila” is a generic word for distilled spirits. Luxco, Inc. v. Consejo Regulador Tequila A.C., Opp. No. 91190827 (TTAB, Jan. 23, 2017) (Bergsman, ATJ).

Consejo Regulador del Tequila (CRT) is a Mexican nonprofit civil association and the only entity accredited and approved by the Mexican government to ensure the authenticity, origin, quality and safety of tequila. As part of its accredited role, CRT sought to register TEQUILA as a certification mark for “distilled spirits, namely, spirits distilled from the blue tequilana weber variety of agave plant,” so that TEQUILA, as used by persons authorized by CRT, would certify that the spirits are manufactured in Mexico from a specific variety of the blue agave plant grown as defined by Mexican law and standards. A “certification mark” is defined in § 45 of the US Trademark Act as any “word, name, symbol, or device, or any combination thereof . . . to certify regional or other origin, material, mode of manufacture, quality, accuracy, or other characteristics of . . . goods or services or that the work or labor on the goods or services was performed by members of a union or other organization.”

Since 1958, Luxco has imported and bottled alcoholic beverages, including tequila, and distilled specialties containing tequila. CRT certified that all the tequila that Luxco imports is authentic in accordance with Mexican law. Despite this certification, Luxco opposed the registration of CRT’s certification mark, claiming that “tequila” is a generic term for distilled spirits.

Before reaching the merits, the TTAB examined whether Luxco had standing to bring the opposition against the certification mark. To oppose an allegedly generic term, the plaintiff must show that it is in a position to use the term in a descriptive or generic manner. Here, the TTAB found that Luxco met this burden, and also found that CRT’s registration of TEQUILA as a certification mark would add a new layer of protection to the term and might thereby create challenges for Luxco in the labeling and marketing of certain of its tequila products.

The TTAB then turned to the merits of Luxco’s claim that “tequila” is a generic term. Under US trademark law, the public’s perception is the primary consideration in determining whether a term is generic. However, a certification mark identifying geographic origin will not be deemed to be a generic term if it retains its ability to designate geographic source. In this case, the TTAB first determined that the relevant goods were “spirits distilled from the blue tequilana weber variety of agave plant.” Second, the TTAB examined whether the purchasing or consuming public primarily understands the word “tequila” to refer to that class of goods. In this regard, the TTAB noted that in 1973, the US Alcohol and Tobacco Tax and Trade Bureau recognized tequila as a distinctive product of Mexico, which established that the term “tequila” may not be used commercially in the United States to describe any product not manufactured in Mexico in compliance with applicable Mexican laws. According to the TTAB, the Bureau’s regulations are probative in determining whether a term is distinctive or generic. However, because public perception takes precedence in the genericness analysis, the TTAB also examined whether end consumers (not just tequila manufacturers) would perceive tequila to be a distilled spirit that comes from Mexico.

The TTAB looked at dictionary definitions, encyclopedia entries, internet search engine results, product labels and other information sources, and found that they tended to show that consumers would perceive that tequila is a Mexican alcoholic beverage. The TTAB also found that advertisements for tequila brands tended to have a “Mexican theme,” incorporate the word “Mexico” and/or use the Spanish language such that these advertisements “deliberately make a linkage to the country of Mexico.” Moreover, CRT introduced into evidence numerous news articles associating tequila with Mexico, and CRT’s survey evidence suggested that 55.4 percent of respondents believe that “tequila” indicates that the product is made in Mexico. Therefore, the TTAB found that Luxco failed to show that tequila is a generic term.

Luxco also argued that the government of Mexico, and not CRT, is the correct owner of the term “tequila.” The TTAB disagreed, explaining that because the Mexican government authorized CRT to apply to register the certification mark in the United States as the entity that verifies compliance with the Mexican standard for tequila, CRT has the right and authority to control the use of the term as a certification mark in the United States and was exercising legitimate control over use of the term.

Less Utility Than Alternatives Does Not Make Product’s Trade Dress Protectable

The US Court of Appeals for the Seventh Circuit affirmed a district court grant of summary judgment in favor of a defendant finding that a bag’s design and shape was functional because the claimed design features affect the product quality. Arlington Specialties, Inc. v. Urban Aid, Inc., Case No. 14-3416, (7th Cir., Jan. 27, 2017) (Hamilton, J.).

Arlington Specialties sells personal care kits containing toiletries. The kits are called “Minimergency Kits” and come in small fabric bags designed to look like men’s dopp kits.

Urban Aid also sells personal care kits. When Arlington found out about the personal care kits sold by Urban Aid, it filed a complaint claiming that the shape and design of Arlington’s bag were protected trade dress and that Urban Aid’s bag caused a likelihood of confusion. Urban Aid moved for summary judgment, arguing that Arlington’s trade dress was generic, that it was functional, that it lacked secondary meaning, and that Urban Aid’s design caused no likelihood of confusion. After the district court agreed that Arlington’s trade dress was functional and not protectable, Arlington appealed.

In its 2001 decision in TrafFix and in its 1992 decision in Two Pesos, the Supreme Court of the United States explained that a product feature is functional if (1) it is essential to the use or purpose of the article, or (2) it affects the cost or quality of the article. Even if a product feature does not satisfy that definition, it can still be functional if it is a “competitive necessity”—that is, if its exclusive use would put competitors at a significant non-reputation-related disadvantage.

On appeal, Arlington argued that summary judgment could be affirmed only if its competitors had to use its claimed trade dress to compete. However, the Supreme Court has rejected the exclusive reliance argument and has held that a feature is functional when it “affects the cost or quality of the device.” Arlington further argued that even though its bags had functional elements, these elements were chosen for their aesthetic appeal rather than for their functional qualities.

The Seventh Circuit affirmed the district court’s grant of summary judgment, concluding that the “undisputed evidence shows that the claimed design features affect product quality, so we need not consider the availability of alternative designs for competitors.” Arlington’s arguments focused on whether the claimed trade dress had “less utility” than alternatives. The Court rebuffed that argument, explaining that “focusing on that question would be contrary to our precedent and sound interpretations of the Lanham Act, offering unlimited monopolies for useful design features.” The Court further found that Arlington’s argument would “encourage peculiar arguments by trade-dress plaintiffs criticizing their own products.” Under prior case law, the right question “is whether the design feature affects product quality or cost or is ‘merely ornamental.’”

Application Partially Voided Where Defendant Lacked Bona Fide Intent to Use Mark

Addressing whether a trademark applicant must have a bona fide intent to use the mark in commerce with respect to all of the goods and/or services listed in the application, the US Court of Appeals for the Sixth Circuit affirmed the district court’s finding that the applicant lacked a bona fide intent to use the mark for at least some of the listed goods and services, but reversed the district court’s decision to void the applications at issue in their entirety. Kelly Servs., et al. v. Creative Harbor, Case No. 16-1200 (6th Cir., Jan. 23, 2017) (Clay, J).

Kelly Services and Creative Harbor adopted (around the same time) the identical mark “WorkWire” for their competing employment-based mobile software applications. Creative Harbor filed two intent-to-use (ITU) applications with the US Patent and Trademark Office. Upon learning of Kelly Services’ use of the mark, Creative Harbor sent a cease and desist letter. Kelly Services responded by bringing a declaratory judgment suit challenging Creative Harbor’s claim that it had priority to the WorkWire mark based on its ITU applications. Creative Harbor moved for partial summary judgment as to its priority claim, which Kelly Services opposed on the ground that Creative Harbor lacked a bona fide intent under § 1(b) of the Lanham Act to use the mark on some of the goods and services listed in its ITU applications. The district court denied Creative Harbor’s summary judgment motion and construed Kelly Services’ opposition as a cross-motion for summary judgment. The district court granted the cross motion, thereby voiding Creative Harbor’s ITU applications in their entirety. Creative Harbor appealed.

The Sixth Circuit affirmed the district court as to the bona fide intent issue, finding that the deposition testimony of Creative Harbor’s CEO sufficiently demonstrated a lack of a bona fide intent to use the WorkWire mark for at least some of the goods and services identified in Creative Harbor’s ITU applications. Specifically, the CEO’s testimony demonstrated that he wanted the ITU applications to cover goods and services not just for present use, but also for possible future exploration and expansion (in his own words: “in case the brand got bigger,” “might be of future importance,” “to keep the option open to at some point do that,” etc.) According to the Court, these statements showed that Creative Harbor did not have a “firm” intention to use the WorkWire mark for all of the goods and services listed in its ITU applications, but rather included them in the applications merely to “reserve a right in the mark” in case it ever decided to expand commercial activities into certain areas.

The Sixth Circuit next addressed whether the district court correctly voided Creative Harbor’s ITU applications in their entirety. Here, the Sixth Circuit reversed, explaining that when an ITU applicant lacks bona fide intent as to some, but not all, of the goods and services listed in the application, the application should not be voided in its entirety absent evidence of fraud or other egregious conduct. According to the Sixth Circuit, courts should identify the goods and services for which the applicant lacks bona fide intent and excise only the overbroad portions of the application. The Court remanded the case back to the district court to evaluate each of the 36 goods and services listed in Creative Harbor’s ITU applications and to make individualized determinations on the issue of bona fide intent based on Creative Harbor’s objective documentary evidence.

Lanham Act Cannot Be Used to Create “Species of Mutant Copyright Law”

The US Court of Appeals for the Ninth Circuit upheld a district court decision granting summary judgment to a defendant that its use of digital files did not infringe plaintiff’s trademark or trade dress for its CD-Gs (compact discs incorporating graphics, lyrics and music that accompany performances by karaoke singers). Slep-Tone Entertainment Corp. v. Wired for Sound Karaoke & DJ Servs., LLC, Case No. 14-17229 (9th Cir., Jan. 18, 2017) (per curiam).

Slep-Tone Entertainment, a manufacturer of CD-Gs played by karaoke operators in conjunction with performances by karaoke singers, brought suit against Wired for Sound Karaoke & DJ Services for trademark infringement and unfair competition. The district court granted summary judgment to Wired as to the trademark and unfair competition causes of action on the grounds that “ripping” the content of Slep-Tone’s CD-Gs onto Wired’s computer hard drive for ease of playback (i.e., eliminating the need to change discs in between performances) was not likely to confuse consumers as to the source of the tangible goods sold by Slep-Tone. The Ninth Circuit agreed but nevertheless remanded the case back to the district court for consideration of the breach of contract claims, since double recovery was no longer a possibility.

In 2009, Slep-Tone brought suit against Wired for its use of the unauthorized computer files instead of the original CD-Gs. The parties settled the previous suit in 2010, but Slep-Tone again filed suit after learning of continuing use of such files. In its second complaint, Slep-Tone argued that when Wired played the songs that were performed, Slep-Tone’s trademarks and trade dress were displayed, and therefore the consuming public would be confused as to the source of origin of the CD-G goods. The Ninth Circuit agreed with the district court that there was no likelihood of confusion—the appropriate test for both trademark infringement and unfair competition—as the content stored on the CD-Gs does not meet the definition of a relevant “good” as defined by the Supreme Court of the United States and the Lanham Act.

Specifically, the Ninth Circuit cited to the Supreme Court’s 2003 discussion in Dastar Corp. v. Twentieth Century Fox Film Corp. that “origin of goods,” for purposes of Lanham Act claims, must “refer[] to the producer of the tangible goods that are offered for sale, and not to the author of any idea, concepts, or communication embodied in those goods.” Dastar refuted the notion that a “species of mutant copyright law” could be used to prohibit unauthorized copying of content stored on physical goods, when those goods (here, the CD-Gs) are typically never viewed by the public or even noted by them. Relevant consumers in this context never see the digital files on the hard drive of the operator’s karaoke system, nor does Wired sell the files or make representations about them to the performers or audience. Because Wired did not use Slep-Tone’s marks “in connection with the sale, offering for sale, distribution, or advertising” of the ripped files on its hard drive, there was no actionable claim under the Lanham Act for trademark infringement or unfair competition, as both require a likelihood of confusion as to the source of the goods.

Keeping Up with the Kardashians’ Attempt to Compel Trademark Arbitration

In a case stemming from a trademark dispute involving a beauty line owned by the Kardashian sisters, the US Court of Appeals for the 11th Circuit affirmed the district court’s denial of a motion to compel arbitration filed by the Kardashians because the sisters were not a party to the agreement containing the invoked arbitration clause, which was explicitly limited to disputes between the parties to the agreement. Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc., et al., Case No. 15-15060 (11th Cir., Jan. 18, 2017) (Carnes, J).

Beginning in 2004, US company By Lee Tillett (Tillett) registered the KROMA trademark in connection with a line of cosmetics, and later licensed the KROMA trademark, for exclusive use in the United Kingdom and the European Union, to Kroma Makeup, EU (Kroma EU). The licensing agreement between Tillett and Kroma EU contained an arbitration clause that provided for independent arbitration in Florida for any “disputes arising between them” (emphasis added) that were “impossible to settle . . . peacefully.”

KROMA cosmetics were being sold in the United States and Europe when the Kardashians entered into a licensing agreement with Boldface Licensing + Branding to create a makeup line called “Khroma.” Shortly after releasing the Khroma line, Boldface filed a declaratory judgment action against Tillett asserting non-infringement of the KROMA trademark. Tillett countered against Boldface and each of the three Kardashians individually, filing trademark infringement claims. In April 2014, the parties settled their disputes, and Tillett represented to Kroma EU that it was recovering damages on the licensee’s behalf. When Tillett later refused to share the settlement recovery, Kroma EU filed a lawsuit for trademark infringement against Tillett and the Kardashians. The Kardashians moved to compel arbitration. After the district court denied the motion, the Kardashians appealed.

Despite not being a party to the Kroma EU-Tillett agreement, the Kardashians asked the 11th Circuit to compel arbitration under Florida’s doctrine of equitable estoppel, which requires the Kardashians to show that Kroma EU was relying on the agreement with Tillett to assert its claims against them, and that the scope of the arbitration clause covered the dispute. The 11th Circuit acknowledged the “federal policy favoring arbitration” but explained that arbitration is a matter of contract and only applies to disputes that parties have agreed to arbitrate.

The 11th Circuit explained that since the Kardashians were not “parties” to the Kroma EU-Tillett agreement, they could not use equitable estoppel to compel arbitration under the arbitration clause. The Court contrasted the facts of the Kardashian case with those where a non-party seeking to compel arbitration under a contract was an officer or agent of a signatory agreement and received rights or obligations under the agreement. Furthermore, the Court was adamant that the “disputes arising between them” language in the Tillett arbitration clause precluded the clause from applying to “any dispute.”

Confirming that the district court correctly denied the Kardashians’ motion to compel Kroma EU to arbitrate the trademark dispute, the 11th Circuit concluded that Florida’s doctrine of equitable estoppel allows a non-party to compel arbitration under an agreement only when the dispute at hand falls within the scope of the arbitration clause.

Practice Note: Believing that the 11th Circuit’s decision is inconsistent with other decisions involving similar agreement language, the Kardashians have asked the 11th Circuit to seek clarification from the Florida Supreme Court on the meaning of the arbitration clause language, or to rehear and reverse the case in lieu of certification to the Florida Supreme Court.

Usenet Server Owners, Operators Are Not Directly or Secondarily Liable for Copyright Infringement

Addressing copyright infringement issues, the US Court of Appeals for the Ninth Circuit affirmed the district court’s summary judgment in defendants’ favor on direct, vicarious and contributory infringement claims. Perfect 10, Inc. v. Giganews, Inc., et al., Case Nos. 15-55500; -55523; -56026 (9th Cir., Jan. 23, 2017) (Nelson, J).

Giganews owns and operates several Usenet servers. “Usenet” is a collection of people and organizations whose computers are connected to one another and can therefore exchange messages. Giganews provides its subscribers access to content that Giganews stores on its own servers, as well as content stored on other Usenet providers’ servers. The content offered through the Giganews servers is almost entirely provided by Usenet users. Livewire Services (together with Giganews, the defendants) provides its subscribers with access to the Usenet content stored on Giganews’ servers but does not own any Usenet servers.

Perfect 10 owns thousands of adult images, many of which have been illegally distributed over Giganews’ servers. Perfect 10 sent Giganews numerous “takedown” notices in connection with these images. When Perfect 10’s takedown notices included machine-readable Message-IDs (the identification number for each item), Giganews responded by taking down the infringing images. When Perfect 10’s notices included illegible Message-IDs, Giganews asked Perfect 10 for the Message-IDs in a legible, machine-readable format, which Giganews claims Perfect 10 failed to provide.

Under the Copyright Act, the copyright owner exclusively owns the right to display, distribute and reproduce its work. Perfect 10 sued defendants for direct, contributory and vicarious copyright infringement of these rights. The defendants successfully moved to dismiss the right to display claim on the pleadings. As to other counts, the district court found in favor of the defendants. Perfect 10 appealed.

On appeal, the Ninth Circuit agreed with the district court that Perfect 10 failed to plead infringement of its display rights. According to the Court, the fact “that users may use Giganews’ reader to display infringing images does not constitute volitional conduct by Giganews.” Distinguishing its earlier panel decision in Perfect 10 v. Amazon.com, where the Court held that Google controlled the storage and communication of the thumbnails, the Court here found that Giganews had a passive role and did not control the images.

The Ninth Circuit further agreed with the district court that defendants did not directly infringe Perfect 10’s distribution and reproduction rights because these acts occurred automatically when the users viewed the images. The Court found that Giganews did not contributorily infringe Perfect 10’s copyrights because it did not “materially contribute[] to or induce[] infringement” of the copyrights. Finally, the Court found that Perfect 10’s vicarious copyright infringement allegations were deficient because Perfect 10 failed to establish that defendants received a direct financial benefit from the infringing activity.

State Law Cannot Blur the Line Between Patents and Copyrights

The US Court of Appeals for the Fifth Circuit determined that a plaintiff could not use a state law claim for unfair competition to protect a valve design, because federal copyright law preempts such a claim. Ultraflo Corp. v. Pelican Tank Parts, Inc., Case No. 15-20084 (5th Cir., Jan. 11, 2017) (Costa, J.).

An Ultraflo employee designed a new butterfly valve for use in the transportation industry and recorded that new valve design in drawings. Pelican, an Ultraflo competitor, later hired the employee. Pelican also began selling a similar butterfly valve. Ultraflo believed that Pelican hired the former Ultraflo employee to access Ultraflo’s valve design, so Ultraflo filed a claim for state unfair competition by misappropriation.

The Fifth Circuit concluded that federal copyright law preempted Ultraflo’s state law claim. The Court reached its conclusion using a two-part test: (1) “whether the intellectual property at issue is within the subject matter of copyright,” and if so, (2) whether the state law claim protects rights that are “equivalent to any of the exclusive rights within the general scope of copyright.”

For the first part of the test, Ultraflo argued that it sought to protect its valve designs, and that copyright law does not protect valve designs. The Fifth Circuit agreed with Ultraflo that copyright law does not protect “useful articles” or “ideas,” and that the valve designs could be useful articles because they have “an intrinsic utilitarian function” that is not merely to convey information. The Court further agreed that the valve designs could qualify as ideas. The Court did not specify which category the valve designs fell into, but determined that since one of these categories applied, the valve designs were not entitled to copyright protection.

The Fifth Circuit explained, however, that even though copyright law did not protect the valve designs, those designs still satisfied the first part of the test by being “within the subject matter of copyright.” Copyright law determines what is entitled to protection as much as it determines what is not entitled to protection. In this case, the valve designs were not entitled to protection. As the Court explained, the valve designs were within the world of copyright law, but copyright law refused to protect them.

The Fifth Circuit also determined that the second part of the test was satisfied because Ultraflo’s claim for unfair competition was equivalent to a copyright claim. For Ultraflo, the elements of a copyright claim were materially the same as the elements of a claim for unfair competition by misappropriation. The Court rejected Ultraflo’s argument that the unfair competition claim was different because it sought to protect use of the valve design drawings to make the valves, whereas copyright law would not protect against that use. The Court explained that while copyright law could theoretically protect this use, Congress decided that it should not. This illustrates the idea-expression dichotomy. Patents protect ideas, and copyrights protect expressions. As the Court explained, Ultraflo’s claim would have been an end run around this distinction.

District Court Does Not Have Unlimited Discretion in Assessing Reasonable Attorneys’ Fees

Addressing attorneys’ fees in the context of a breach of contract claim, the US Court of Appeals for the 11th Circuit reversed the district court’s limited award of attorneys’ fees, finding the award inconsistent with the express language of the contract between the parties. Yellow Pages Photos, Inc. v. Ziplocal, LP, Case No. 16-11868 (11th Cir., Jan. 24, 2017) (per curiam).

Yellow Pages Photos, Inc., (YPPI) and Ziplocal LP entered into a contract that provided Ziplocal with a license to a series of YPPI’s stock photographic images and subject matter headings. YPPI eventually sued Ziplocal for breach of contract and copyright infringement, alleging that Ziplocal provided YPPI’s licensed photographs to a third party without YPPI’s permission. The jury found in YPPI’s favor on both the breach of contract and copyright infringement claims. Although YPPI was the prevailing party and was entitled to recover fees and costs under its contract with Ziplocal, the district court substantially reduced YPPI’s request for attorneys’ fees to reflect YPPI’s relative degree of success in the litigation, and also found that YPPI was not entitled to recover attorneys’ fees related to its copyright infringement claims. The district court made similar adjustments to YPPI’s award of nontaxable costs. YPPI appealed to the 11th Circuit.

The 11th Circuit reversed, finding that the district court erred by not awarding fees for the copyright infringement claims. As the 11th Circuit explained, the copyright infringement claims arose directly out of the contract between YPPI and Ziplocal. As such, these claims fell within the scope of the attorneys’ fees provision in the contract between YPPI and Ziplocal, which expressly contemplates the award of fees based on litigation “in conjunction with the use of the product.” According to the 11th Circuit, the language of the contract is broad enough to cover YPPI’s copyright infringement claims, and YPPI is entitled to reasonable attorneys’ fees for that claim.

The 11th Circuit also found that the district court erred by substantially reducing the award of attorneys’ fees, because the district court used a strictly mathematical approach based on a ratio of total claims to successfully litigated claims. This strictly mathematical approach failed to adequately take into account all relevant factors, such as the intention of the contract, and was improperly based on the application of a proportional modifier representing the degree of success YPPI enjoyed at trial. The contract between YPPI and Ziplocal explicitly entitles the winning party to recover “its attorney’s fees and costs,” without limiting the recovery of fees to a “reasonable” amount. This contract language suggests a full recovery of the fees expended in the litigation related to the contract. By reducing YPPI’s attorneys’ fees by more than 90 percent, the district court denied YPPI the benefit of its bargain, essentially rendering the contract’s fee-shifting provision meaningless.

Similarly, the 11th Circuit found that the district court abused its discretion by applying the same mathematical approach to the award of nontaxable costs. Eleventh Circuit precedent has established that shifting costs in favor of the prevailing party is appropriate even in the case of a nominal award, so long as the prevailing party “obtains judgment on even a fraction of the claims advanced.” Although a reduction in costs can be justified on the grounds of minimal success, such justification is not met through the rote application of a mathematical formula, as in this case. For the above reasons, the 11th Circuit reversed the district court and remanded the case for further proceedings not inconsistent with its opinion.

Veteran Class-Action Suits Following Data Breaches Dismissed for Lack of Standing

In a decision consolidating two cases involving two veterans and two separate incidences of data breaches at the Veterans Affairs Medical Center (VAMC) in South Carolina, the US Court of Appeals for the Fourth Circuit clarified the applicable standing requirement for data privacy actions and affirmed the dismissal of both suits. Beck et al. v. Robert A. McDonald, Case No. 15-1395; Watson v. Robert A. McDonald, Case No. 15-1715 (4th Cir., Feb. 6, 2017) (Diaz, J). Relying on the 2013 Supreme Court of the United States decision in Clapper v. Amnesty International, the Court explained that standing based on a threatened injury of future identity theft is too speculative absent evidence or allegation that the data thief intentionally targeted, accessed and/or misused the personal information compromised in the breach.

Beck, a veteran, filed a putative class-action suit following the February 2013 misplacement or theft of an unencrypted VAMC laptop containing personal patient information. Watson, another veteran, filed a putative class-action suit following VAMC’s discovery that four boxes of pathology reports had been misplaced or stolen; such reports have yet to be recovered.

Both suits, brought under the Privacy Act (5 USC § 552a et seq.), were dismissed for lack of standing. In Beck, the district court found that at the summary judgment stage, Beck had not submitted evidence sufficient to create a genuine issue of material fact as to whether the risk of identity theft was “certainly impending.” In Watson, at the pleading stage, the district court found that Watson had not alleged any actual or attempted misuse of her personal information. The district court found that the fear of harm from future identity theft was “too speculative” and was “contingent on a chain of attenuated hypothetical events and actions by third parties independent of the defendants.” The district court also rejected the allegation that any costs incurred to fend off future identity theft constituted an injury-in-fact. Plaintiffs appealed.

The circuit courts are split as to whether Article III injury-in-fact may be based on an increased risk or threat of future identity theft. The Sixth, Seventh and Ninth Circuits have recognized that plaintiffs can, at the pleading stage, establish an injury-in-fact based on threatened injury, whereas the First and Third Circuits have not. In either case, according to the Fourth Circuit, Clapper’s iteration of the well-established tenet that “a threatened injury must be ‘certainly impending’ to constitute an injury-in-fact” is controlling.

The Fourth Circuit agreed with the district court that neither Beck nor Watson went beyond speculation to “certainly impending,” as both required the court to engage in an “attenuated chain of possibilities.” Indeed, the Court noted that since 2013 and 2014, when the data breaches in Beck and Watson occurred, respectively, plaintiffs had not uncovered evidence—or even alleged—that the information had been accessed or misused or that they had suffered identity theft or been victim of an attempted identify theft.

The Fourth Circuit also concluded that plaintiffs fell short of establishing standing based on a “substantial risk” that the harm will occur. For example, plaintiffs claimed that “33% of health-related data breaches result in identity theft.” However, even if this statistic were true, the Court noted that it left unharmed more than 66 percent of veterans affected by the breach and therefore did not establish a “substantial risk” of harm. The Court also decline to infer a substantial risk of harm of future identity theft from an organization’s offer to provide free credit monitoring services to affected individuals, or from the VA’s internal investigations that not only concluded that the laptop and pathology reports had been stolen, but also that a “‘reasonable risk exists’ for the ‘potential misuse’” of personal information.

Finally, with respect to standing, the Fourth Circuit rejected plaintiffs’ allegation that they had suffered an injury-in-fact because they had incurred or will in the future incur mitigation expenses to guard against identity theft, noting that these “self-imposed harms cannot confer standing.”