IP Update, Vol. 20, No. 3

Export of Single Component of Patented Combination Does Not Impose Liability Under § 271(f)(1)

In reversing the US Court of Appeals for the Federal Circuit, an essentially unanimous Supreme Court of the United States ruled that the “supply of a single component of a multi-component invention for manufacture abroad does not give rise to liability” under 35 USC § 271(f)(1). Life Technologies Corp. v. Promega Corp., Case No. 14-1538 (Supr. Ct., Feb. 27, 2016) (Sotomayor, Justice).

Promega’s asserted patents related to DNA amplification kits. LifeTech’s accused kit consisted of five components, including an enzyme called Taq polymerase that is essential to the operation of the kit. LifeTech manufactures Taq polymerase in the United States, then ships it to a facility in the United Kingdom for incorporation into the accused kit. The accused products are sold worldwide, including in the United States.

The district court granted LifeTech’s motion for judgment as a matter of law that it was not liable under § 271(f)(1) for sales outside of the United States because the phrase “all or a substantial portion” does not encompass the supply of a single component of a multi-component invention. In doing so, the district court set aside a jury verdict of $52 million. The Federal Circuit reversed, stating that “there are circumstances in which a party may be liable under § 271(f)(1) for supplying or causing to be supplied a single component for combination outside the United States” (IP Update, Vol. 18, No. 1). Because Taq polymerase was essential to the operation of the kits, the Federal Circuit found that it was a “substantial portion” of the patented invention and reinstated the verdict.

The Supreme Court granted certiorari (IP Update, Vol. 19, No. 7) to answer the following question:

Whether the Federal Circuit erred in holding that supplying a single, commodity component of a multi-component invention from the United States is an infringing act under 35 U.S.C. § 271(f)(1), exposing the manufacturer to liability for all worldwide sales.

Section 271(f)(1) states:

Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer. (emphasis added)

Relying on the text of the statute and the legislative history, the Supreme Court concluded that the statutory language “substantial portion” imposed a quantitative, not simply qualitative, requirement.

The Supreme Court determined that the term “substantial,” while having a plain meaning, was (in the context of § 271(f)(1)) ambiguous, in that in isolation it might refer to quantity or quality. However, considering the term in context, the Supreme Court found that the appropriate construction was to accord the word “substantial” a quantitative meaning. The Supreme Court noted that the words “all” and “portion” in the statute convey a quantitative meaning—an indication that “substantive” should similarly be assigned a quantitative meaning. Further, the Supreme Court explained that assigning “substantive” a qualitative meaning would render the phrase “of the components” unnecessary the first time it is used in § 271(f)(1). Because an interpretation that gives meaning to each statutory provision should be favored, this also points to a quantitative meaning.

Noting the multiple uses of the term “components” in the plural in § 271(f)(1), the Supreme Court concluded that a single component as a matter of law cannot ever constitute a “substantial portion” of the components of a patented invention under § 271(f)(1).

The Supreme Court found further support for its decision in the interplay between §§ 271(f)(1) and (f)(2). Section 271(f)(2) is a companion provision to § 271(f)(1) and reads as follows:

Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial non-infringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer. (emphasis added)

Section 271(f)(2) was not invoked in this case because Taq polymerase has many non-infringing uses. The Supreme Court noted that reading § 271(f)(1) to refer to more than one component allows the two provisions to work in tandem. On the other hand, reading § 271(f)(1) to cover any single component would leave little room for § 271(f)(2) and would also undermine that section’s express reference to “any component [singular] . . . especially made or especially adapted for use in the invention.”

Finally, the Supreme Court observed that Congress enacted § 271(f) in response to Deepsouth Packing v. Laitram, which identified a then-existing gap in the enforceability of patent rights, i.e., that shipping components offshore and then making or using a patented product outside of the United States was not an infringement. Section 271(f) filled this gap by imposing liability where components are manufactured in the United States but assembled overseas.

Giving Patent Enforcement the Personal Touch May Create Personal Jurisdiction

Clarifying what type of patent enforcement action might create personal jurisdiction, the US Court of Appeals for the Federal Circuit found that where a patent owner visits a forum to negotiate licensing, that activity supports sufficient minimum contacts to make personal jurisdiction fair and reasonable. Xilinx, Inc. v. Papst Licensing GmbH & Co. KG, Case No. 15-1919 (Fed. Cir., Feb. 15, 2017) (Dyk, J).

Papst Licensing, a German non-practicing entity, sent two patent infringement notice letters to Xilinx, a California company, and traveled to California to negotiate a license to its patents.

Eventually, Xilinx filed for a declaratory judgment in California seeking a declaration of non-infringement and invalidity of Papst’s patents. The district court dismissed the case for lack of personal jurisdiction over Papst. The district court concluded that under Federal Circuit precedent, Papst’s efforts to license its patents to Xilinx were “enforcement activities” that were irrelevant to jurisdiction and therefore insufficient to create personal jurisdiction. Xilinx appealed.

The Federal Circuit reversed, noting that the California Long Arm Statute is coextensive with the Due Process Clause and therefore only a due process analysis was required. After confirming its analysis, the Court found that the district court in California had specific (as opposed to general) personal jurisdiction over Papst.

The Federal Circuit noted that Papst had purposefully directed its activities to California by sending notice letters threatening an infringement suit and traveling to California to meet with Xilinx. Xilinx’s declaratory judgment related to these relevant contacts. The Court explained that, except in rare cases, minimum contacts make jurisdiction presumptively reasonable unless the defendant can provide a compelling case that jurisdiction is unreasonable based on, e.g., the burden on the defendant, the forum state’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, or the shared interest of several states in furthering fundamental substantive social policies. The Federal Circuit noted that the state of California had a vested interest in protecting its residents from unwarranted infringement claims and that Xilinx had an interest in using a forum near its home. Xilinx’s declaratory judgment action was an efficient method of resolving the dispute, and there was no conflict with other states.

Papst argued that a California forum presented a burden. The Federal Circuit had previously found (in its 1998 Red Wing Shoe and its 2008 Avocent Huntsville v. Aten International decisions) that enforcement activity undertaken within a jurisdiction was by itself insufficient to meet the reasonableness requirement for personal jurisdiction. The Federal Circuit disagreed, noting that here, unlike the prior cases, Papst had not stopped at cease-and-desist letters, but had traveled to California to meet with Xilinx. By traveling to California, Papst created a “territorial presence” that “reinforce[d] the reasonable foreseeability of suit there.” The Court reasoned that the lack of burden on Papst was further supported by its foreign non-practicing entity status, which deprives it of a home forum and requires it to litigate far from home regardless, and the fact that it had litigated in California previously.

Appellate Court Mows Down Objections to Preliminary Injunction

Addressing preliminary injunction issues in a case between two competitors, the US Court of Appeals for the Federal Circuit affirmed the district court’s grant of the injunction, finding that the plaintiff would likely suffer irreparable harm as a result of an “ecosystem effect” that made it difficult to quantify damages. Metalcraft of Mayville, Inc. v. The Toro Co., Case No. 16-2433 (Fed. Cir., Feb. 16, 2017) (Moore, J).

Metalcraft (doing business as Scag) owns a patent directed to a lawnmower with a “suspended operator platform,” which suspends the operator’s entire body above the mower chassis so that the operator is isolated from vibrations or shocks resulting from rough terrain. After Scag began marketing and selling its suspended operator platform lawnmowers, Toro entered the market with its version of the product. Toro’s suspended operator platform lawnmower was not identical, however; Scag’s lawnmower included a suspended control platform, while the controls on Toro’s mowers were fixed to the chassis. Scag filed an infringement action against Toro and moved for a preliminary injunction. After the district court granted Scag’s request for a preliminary injunction, Toro appealed.

Reviewing the district court’s grant of the preliminary injunction under an abuse of discretion standard, the Federal Circuit affirmed the district court. For each factor, however, the Federal Circuit reviewed the underlying determinations under their corresponding standards (i.e., reviewing infringement for clear error and reviewing claim construction and obviousness de novo), except for subsidiary factual findings (such as the district court’s determination as to motivation to combine), which the Court reviewed for clear error.

The Federal Circuit found no error in the district court’s infringement analysis and agreed with the district court’s claim construction. On this issue, Toro argued that its mowers did not infringe because its platform did not suspend the “entire body” of the operator as Toro believed the claims required. According to Toro, because its lawnmowers included controls fixed to the chassis, the operator’s hands would not be “suspended” when operating the controls. The Federal Circuit rejected this argument, finding that district court correctly determined that the claims did not require the controls to be mounted on the suspended platform.

The Federal Circuit also found that there was no substantial question of validity. On appeal, Toro argued that the district court improperly rejected Toro’s motivation to combine certain prior art references. The Federal Circuit found no clear error in this factual determination, noting that Toro provided no explanation for how or why the references would be combined to arrive at the claimed invention.

As to irreparable harm, the district court found that Scag would likely suffer irreparable harm because it would be impossible to quantify Scag’s damages. Specifically, testimony of record in the case showed that “ecosystem effects” made it too difficult to quantify harm, because customers who purchased an infringing Toro product may develop loyalty to Toro, continue to buy Toro’s products and recommend Toro products to others. Given this unquantifiable, far-reaching and long-term impact on Scag’s future revenues, the Federal Circuit agreed that Scag was likely to suffer irreparable harm without a preliminary injunction.

As to the balance of equities, the Federal Circuit found no abuse of discretion in the district court’s determination that Scag’s hardship in having to compete against its own patented invention outweighed Toro’s perceived hardship in disrupting the status quo. Not only would the injunction highlight the importance of encouraging innovation, the public would also continue to have access to the patented system from Scag. For these reasons, the Federal Circuit agreed that the balance of equities favored Scag and that the grant of an injunction was in the public interest.

Federal Circuit Evaluates PTAB Reliance on Expert Testimony to Satisfy Substantial Evidence

Addressing for the first time the extent to which the Patent Trial and Appeal Board (PTAB) may rely on expert testimony to satisfy the substantial evidence standard of review, the US Court of Appeals for the Federal Circuit affirmed in part, vacated in part and remanded the PTAB’s decision of obviousness in an inter partes reexamination proceeding. Icon Health & Fitness, Inc. v. Strava, Inc., Case No. 2016-1475 (Fed. Cir., Feb. 27, 2017) (Wallach, J) (O’Malley, J, concurring in part and dissenting in part).

Strava sought inter partes reexamination of Icon’s patent. During the proceedings, Strava submitted expert declarations in support of its obviousness arguments. The declarations addressed the pertinent factual issues but also included opinions (from technical experts) as to the ultimate question of obviousness. The examiner rejected the claims as obvious in view of the prior art and in many cases expressly adopted Strava’s reasoning and incorporated by reference the analysis provided in Strava’s briefing. In due course, the PTAB affirmed the examiner’s decision and, with respect to some of the claims, adopted the examiner’s reasoning without providing independent fact finding or analysis. Icon appealed.

Icon argued that the PTAB erred in relying on the “legal conclusions” of Strava’s expert in affirming the examiner’s finding of obviousness. In particular, Icon argued that Strava’s expert’s declarations “go well beyond supplying opinions regarding factual matters” because they “improperly” reach the ultimate conclusion that the claims are obvious. Icon further argued that because the examiner cited to large portions of the expert’s declarations, the expert’s legal conclusions improperly supplanted the Examiner’s analysis.

Icon did not dispute that Strava’s technical expert was qualified, but argued that “the Examiner erred because he extensively cited to statements in the [expert] Declarations.” As a result, Icon argued, “the Examiner ‘did not form his own legal conclusions of obviousness’ but rather ‘adopted the legal conclusions provided to him by [Appellees’ expert].’”

The Federal Circuit rejected Icon’s arguments, explaining that to the extent that Icon “challenges the PTAB’s factual findings, as adopted from the Examiner, the PTAB is permitted to weigh expert testimony and other record evidence and, in so doing, rely on certain portions of an expert’s declaration while disregarding others.” Further, with regard to Icon’s challenge to the PTAB’s legal conclusions, “there is no per se prohibition against relying on an expert’s declaration in support of factual findings underlying a legal conclusion of obviousness solely because the declaration states that something ‘would have been obvious.’” As the Court noted, “we frequently have affirmed PTAB determinations on obviousness that rely on expert declarations that include such statements, so long as other aspects of the declarations contain statements related to factual findings.”

Even though the examiner and the PTAB were permitted to rely on expert testimony in finding the claims obvious, the Federal Circuit found that the wholesale adoption of such testimony without independent fact finding or explanation failed to satisfy the substantial evidence standard. For example, with respect to some of the claims at issue, the PTAB adopted and incorporated by reference the examiner’s findings and analysis, but the examiner’s findings and analysis were themselves limited to adoption and incorporation of Strava’s arguments. As a result, “[n]either the PTAB nor the Examiner made any factual findings; instead both purported to incorporate by reference arguments drafted by Appellees’ attorneys.” But “[a]ttorney argument is not evidence,” and the PTAB’s and the examiner’s “adoption” of such attorney argument cannot “transform Appellees’ attorney argument into factual findings or supply the requisite explanation that must accompany such findings.” The Court reached the opposite conclusion for claims where either the examiner or the PTAB made findings of fact and provided explanations sufficient to discern the link between the facts and the conclusion of obviousness.

Factual Findings Required to Show “Apparent Reason to Combine”

Addressing issues of obviousness and anticipation in the context of an inter partes review, the US Court of Appeals for the Federal Circuit issued two decisions with respect to the same patent, vacating and remanding the Patent Trial and Appeal Board’s (PTAB’s) decision finding the claims invalid as obvious in the first case, and affirming the PTAB’s finding that the claims were not anticipated in the second case. Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center v. Eli Lilly and Co., Case No. 16-1518 (Fed. Cir., Feb. 28, 2017) (Bryson, J) (Newman, J, concurring in part, dissenting from the judgment); Eli Lilly and Co. v. Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center, Case No. 16-1547 (Fed. Cir., Feb. 28, 2017) (Bryson, J).

The patent at issue relates to a method of “arresting or regressing” a condition known as penile fibrosis by long-term daily administration of drugs known as type 5 phosphodiesterase (PDE5) inhibitors. Penile fibrosis includes two conditions, penile tunical fibrosis and corporal tissue fibrosis, each of which can cause erectile dysfunction, although they do not always do so. Los Angeles Biomedical Research Institute (LAB) sued Eli Lilly, alleging induced infringement of its patent by Eli Lilly’s marketing of the drug Cialis, a PDE5 inhibitor. Eli Lilly subsequently filed a petition for inter partes review, contending that all claims of the patent were obvious in light of three prior art references. The PTAB ultimately concluded that the challenged claims were obvious because the combination of references satisfied each limitation of the challenged claims as construed and, further, because the combination provided a reasonable expectation of success in treating erectile dysfunction. LAB appealed.

The Federal Circuit agreed with LAB’s contention that the PTAB’s findings were insufficient to establish obviousness under the correct claim construction. Specifically, the Court found that, while the PTAB concluded that the prior art references rendered obvious the treatment of erectile dysfunction via the claimed method, it did not make factual findings to determine whether those references showed it would have been obvious to use long-term continuous treatment with a PDE5 inhibitor to treat individuals with penile fibrosis and to achieve the arrest or regression of that condition. The Court noted that the correct construction of the pertinent claim language required more than simply treating erectile dysfunction. The Court also noted that the PTAB failed to consider the possibility that, even if the combination of prior art references taught long-term treatment with a PDE inhibitor of individuals with some forms of erectile dysfunction, a person of skill in the art may not have been motivated to combine those same references to treat individuals with fibrosis-related erectile dysfunction, for whom, LAB argued, the results would have been expected to be detrimental.

The Federal Circuit remanded the case back to the PTAB to make factual findings as to whether there was an apparent reason to combine the prior art references to treat penile fibrosis and whether a person of skill in the art would have had a reasonable expectation of success from such a combination. The Court also remanded for the PTAB to make factual findings bearing on the obviousness of the “arresting or regressing” limitation, including consideration of inventor statements during prosecution that administration for 45 days of an extremely high dose of sildenafil (PDE5 inhibitor) was required to achieve the arrest or regression of penile fibrosis.

Judge Newman dissented, stating that she would affirm the PTAB’s decision. According to Newman, there was no reversible error in the PTAB’s decision, and the PTAB’s findings were supported by substantial evidence. With respect to the majority’s remand back to the PTAB, Newman noted that “such further proceedings fail the policy and purpose of the America Invents Act, and should be invoked only when there are major defects in the PTAB proceeding requiring activity and redetermination that is not available on the appellate record.” She also explained that, in this case, finality was available, and it was the Court’s obligation to decide the merits because “the issues were fully developed, with eloquent argument all around, [along with] an extensive Board opinion.”

In the companion case, the Federal Circuit affirmed the PTAB decision finding that the challenged claims were not anticipated. The companion case related to a separate inter partes review petition by Eli Lilly contending that all claims of the same patent were anticipated. The PTAB instituted on the petition but ultimately concluded that the prior art did not anticipate the claims because it did not disclose a limitation requiring administration of a PDE5 inhibitor “at a dosage up to 1.5 mg/kg/day for not less than 45 days.” On appeal, Eli Lilly argued that the prior art’s definition of “chronic administration” anticipated the claimed requirement of daily administration for 45 days or more because a person of skill in the art would understand that erectile dysfunction (in the absence of therapy) can last longer than 45 days. The Federal Circuit was not persuaded, noting that Lilly’s argument was “at best, [ ] an obviousness argument.” According to the Court, substantial evidence supported the PTAB’s finding that the prior art did not disclose the claimed treatment regimen “with sufficient clarity to satisfy the demanding standard for anticipation.”

Obviousness Does Not Speak for Itself

Addressing the issue of evidence required for a sustainable obviousness determination, the US Court of Appeals for the Federal Circuit vacated a Patent Trial and Appeal Board (PTAB) finding of obviousness of the challenged claims because the PTAB’s rationale lacked evidentiary support. Personal Web Technologies, LLC v. Apple, Inc., Case No. 16-1174 (Fed. Cir., Feb. 14, 2017) (Taranto, J).

Apple petitioned for inter partes review of Personal Web Technologies’ (PWT’s) claims directed to methods and devices of locating data and controlling access to data. In its petition, Apple asserted that the challenged claims were obvious over two references, a position adopted by the PTAB. The PTAB further agreed with Apple that a person of ordinary skill in the art reading the two references would have understood that the combination allowed for the features of the challenged claims. PWT appealed.

In reviewing the adequacy of the PTAB’s obviousness analysis, the Federal Circuit stated that the analysis was lacking and the basis for obviousness must be made explicit: “The process of review requires that the grounds upon which the administrative agency acted be clearly disclosed and adequately sustained.” The Court noted that the PTAB discussed the first reference as satisfying an element, yet did so citing portions of Apple’s petition that relied on the second reference. The Court also found that the PTAB did not clearly address another claim element. The Court further explained that the cited portions of the references were not self-explanatory and that the Court would not rely on its own independent reading of the references. The Court concluded that the PTAB did not adequately support its findings that the prior art disclosed all elements of the challenged claims.

The Federal Circuit also found deficient the PTAB’s reasoning that a relevant skilled artisan would have had a motivation to combine the references in the way claimed. The PTAB agreed with Apple’s contention that a person of ordinary skill in the art reading the references would have understood that the references could be combined. However, the Court found that discussion did not imply a motivation to pick out the two references and combine them to arrive at the claimed invention. Rather, the Court explained that a clear, evidence-supported account of the contemplated workings of the combination is a prerequisite to adequately explaining and supporting a conclusion that a relevant skilled artisan would have had a rationale to make the combination and reasonably expect success in doing so.

Incorporation by Reference Used to Arrive at BRI Claim Construction

Resolving what was primarily a broadest reasonable interpretation (BRI) claim construction issue, the US Court of Appeals for the Federal Circuit upheld a Patent Trial and Appeal Board (PTAB) decision that invalidated claims of a patent directed to scanning a document and sending it to an email address as a PDF file. MPHJ Technology Investments, LLC, v. Ricoh Americas Corporation, et al., Case No. 16-1243 (Fed. Cir., Feb. 13, 2017) (Newman, J) (O’Malley, J, dissenting in part).

Patent owner MPHJ argued that the PTAB wrongly construed the claims during an inter parte review (IPR) proceeding to mean that the scanning and emailing steps could be performed as separate steps. In particular, MPHJ argued that “the claimed ‘seamless’ transmission requires a one-step operation without human intervention,” and stressed “that ‘seamless’ transmission means that ‘no user intervention is needed’ between copying and destination.” In support, MPHJ cited statements in one of its provisional applications that it argued expressly limit the scope of the claims to a one-step copying and sending process. The Federal Circuit disagreed, noting that these statements were not present in the patent because they were removed during prosecution.

Of particular interest, the Federal Circuit treated the incorporation of the provisional application by reference as evidence that the applicant intended to remove the one-step limitation. The Court explained that the patent “contains no statement or suggestion of an intent to limit the claims” to a single step and in fact describes single-step operation as “optional.” Even though the specification of the provisional application was incorporated by reference into the patent, the Court concluded “that a person of skill in this field would deem the removal of these limiting clauses to be significant,” and that a competitor “would reasonably conclude that the inventor intended that single-step operation would be optional, not obligatory.” The Court concluded that substantial evidence supported the PTAB’s ruling that the challenged claims were unpatentable in view of the prior art.

In dissent, Judge O’Malley disagreed with some of the claim constructions adopted by the panel and, based on an alternative construction, would have found some claims to be patentable.

Structurally and Functionally Related Excipient Not Within Asserted Claim’s Markush Group

The US Court of Appeals for the Federal Circuit reversed a district court’s judgment of infringement, finding that the accused product contained an excipient not within the asserted claim’s closed Markush group. Shire Dev., LLC v. Watson Pharm., Inc., Case No. 16-1785 (Fed. Cir., Feb. 10, 2017) (Hughes, J).

The patent at issue is directed to a controlled-release oral pharmaceutical composition of mesalamine used to treat certain inflammatory bowel diseases. The claimed composition includes the mesalamine active ingredient, an inner lipophilic matrix, an outer hydrophilic matrix and other optional excipients. A lipophilic matrix has an affinity for lipids and resists dissolving in water, while a hydrophilic matrix has an affinity for water and readily dissolves in water.

In a previous appeal, the Federal Circuit found that the claimed matrix compositions were limited by the Markush groups added during prosecution to overcome the examiner’s obviousness rejection (IP Update, Vol. 18, No. 7). In that prior appeal, the Court also found that the correct construction of the claims required that the inner volume contain substances from the group described for the inner lipophilic matrix, and that the outer volume separately contain substances from the group described for the outer hydrophilic matrix.

A Markush claim is a particular kind of patent claim that lists alternative species or elements that can be selected as part of the claimed invention. The language of a Markush claim is generally presumed to exclude any elements, steps or ingredients not specified in the claim, unless this presumption is overcome by the specification and prosecution history. Specifically, at issue in this case, the Markush group is recited as follows:

[A]n outer hydrophilic matrix wherein the lipophilic matrix is dispersed, and said outer hydrophilic matrix consists of compounds selected from the group consisting of polymers or copolymers of acrylic or methacrylic acid, alkylvinyl polymers, hydroxyalkyl celluloses, carboxyalkyl celluloses, polysaccharides, dextrins, pectins, starches and derivatives, alginic acid, and natural or synthetic gums. (emphasis added)

On remand, the district court found that Watson’s abbreviated new drug application (ANDA) product satisfied the Markush limitations despite containing an excipient falling outside of the Markush group, i.e., magnesium stearate. Relying on the Federal Circuit’s 2004 decision in Norian Corp., the district court concluded that the magnesium stearate was “unrelated” to the invention because it did not drive the water-affinity property of the respective matrix, and thus the inclusion of this excipient did not avoid infringement. Watson appealed.

The Federal Circuit reversed. The Court found that Watson’s ANDA product did not literally infringe the recited Markush group because the product included an excipient not within the Markush group. Disagreeing with the district court’s interpretation of Norian, the Federal Circuit explained that Norian did not restrict “related” components to only those that advance or are intended to advance a Markush group’s allegedly inventive elements. The Court thus rejected Shire’s argument that, notwithstanding the addition of magnesium stearate, the accused product satisfied the Markush group because the excipient is “overwhelmed” by the hydrophilic properties of the sodium starch glycolate in the extragranular space. The Court found that the magnesium stearate structurally and functionally relates to the invention because it retains its lipophilic character in the extragranular space. Concluding that magnesium stearate’s presence in the outer matrix is inconsistent with the “consisting of” requirement in claim 1(b), the Court found that Watson’s ANDA product did not satisfy the Markush group requirement and therefore did not infringe.

Practice Note: The Federal Circuit explained that the Markush group “consisting of” was different from one recited as “comprising” or “consisting essentially of,” which might admit components not explicitly recited in the claim.

Co-Pending Litigation Is Not Sufficient Basis to Deny Transfer Motion

Addressing jurisdictional transfer issues in a divided opinion, the US Court of Appeals for the Federal Circuit granted the extraordinary relief of issuing a mandamus order to transfer a patent infringement case, finding that the district court effectively failed to consider the merits of the defendant’s transfer motion even though the district court weighed all relevant transfer factors. In re: Google, Inc., Case No. 17-107 (Fed. Cir., Feb. 23, 2017) (Prost, CJ) (Linn, J, dissenting) (non-precedential).

This case was initiated when Eolas Technologies sued Google in the Eastern District of Texas for patent infringement. Eolas and Google had litigated against each other prior to this suit. Eolas had previously sued Google in the Eastern District of Texas for patent infringement involving related technology. In the prior case, Google’s motions to transfer and for mandamus were both denied. Google also filed a separate declaratory judgment action relating to other Eolas technology in the Northern District of California.

On the same day that it sued Google, Eolas also sued Amazon and Walmart entities for infringement of the same patent in the same court. Those defendants separately filed motions to transfer venue for convenience to the Northern District of California, each within the same week. The district court denied Walmart’s motion, then Google’s, then Amazon’s. The court issued each decision weeks apart from the preceding decision. In deciding Google’s transfer motion, pursuant to 28 USC § 1404(a), the district court weighed each of the four public-interest factors and four private-interest factors mandatorily considered for a motion to transfer for convenience in the Fifth Circuit. See TS Tech (IP Update, Vol. 12, No. 2).

The district court found that the co-pending litigation with Walmart and Amazon in the same district involving the same patent, as well as the Eastern District’s institutional knowledge relevant to the case obtained from prior litigation between the parties, weighted against transfer. Each of these elements was considered as part of the “other practical considerations” private-interest factor. With respect to the factor requiring balancing the location of witnesses and documentary evidence, the district court found that the location of witnesses and documents at Google’s Northern California headquarters only slightly favored transfer when compared to Eolas’s single employee in the Eastern District of Texas. On balance, the district court found that transfer was not warranted. Google sought mandamus from the Federal Circuit.

The Federal Circuit concluded that the district court improperly overemphasized the “other practical considerations” factor and underemphasized the disparity between Google’s geographic ties to sources of proof as compared to Eolas. According to the Court, the mere co-pendency of related suits in a particular district could not serve as the basis for denying a motion to transfer because such co-pendency would automatically tip the balance in the non-movant’s favor regardless of the existence of co-pending transfer motions and their underlying merits. The Court further found that the Eastern District’s prior experience with the litigants was untenable because the judge presiding over the previous case had retired. The Court also found that the district court did not afford the “relative ease of access to sources of proof” private-interest factor enough weight. The Federal Circuit parted ways with the district court on this factor, noting that it was perhaps the most important of the eight and that it significantly favored Google. In view of these considerations, the Federal Circuit issued a mandamus order transferring the case to the Northern District of California.

The dissent would have denied mandamus relief because it was undisputed that the district court considered all relevant factors, and the heightened mandamus standard of review did not permit the Court to reweigh those factors. Specifically, Judge Linn opined that the majority went beyond its limited role in the mandamus context of assessing whether the district court fully considered each of the eight transfer considerations. According to Linn, the Court rebalanced the considerations and substituted its own judgment, thereby usurping the district court’s role in weighing the factors and making the final determination. The dissent also argued that Google did not show a clear abuse of the district court’s considerable discretion or that the ruling produced the patently erroneous result necessary for the relief sought.

Dutch Court Rules in Standard Essential Patent Abuse of Dominance Claim

The Hague District Court in the Netherlands rejected a claim brought by smartphone maker Archos alleging that Philips had abused its dominant position during negotiations concerning licenses on fair, reasonable and non-discriminatory (FRAND) terms for standard essential patents (SEPs). Archos S.A. v. Koninklijke Philips N.V. (Dist. Ct. of The Hague, Feb. 10, 2017)

In June 2014, Philips discovered that Archos had used three of Philips’s patents covering UMTS and LTE technology. Because they covered standards used to transmit data via smartphones, the patents were registered as SEPs with the European Telecommunications Standards Institute.

After Philips notified Archos that it was using Philips’s SEPs, the two parties entered into negotiations. In July 2015, Philips made Archos an offer of EUR 0.7 per product sold that used UMTS and/or LTE functionality. In January 2016, Archos countered with an offer of EUR 0.07 per product.

These offers were made two weeks after the European Court of Justice (ECJ) decision in Huawei v. ZTE. In that case, the ECJ established three core principles concerning the licensing of SEPs on FRAND terms:

• The burden of making an offer lies with the SEP holder.
• The determination of what constitutes a FRAND offer is left up to national courts across European jurisdictions.
• An application by an SEP holder for an injunction against an alleged infringer that is not preceded by an opportunity for the alleged infringer to license the patent on FRAND terms is an abuse of dominance.

After unsuccessfully having made an offer in line with Huawei, Philips sought an injunction against Archos to prevent it from using Philips’s SEPs. Archos applied to the same court simultaneously, arguing that Philips’s offer had not been on FRAND terms and that, in line with Huawei, Philips’s application for an injunction was an abuse of dominance. Archos argued that Philips’s offer was too high in light of the fact that Archos produces low-cost smartphones and generates low profit margins. Archos further claimed that Philips had shown inflexibility in its negotiations.

The Hague District Court rejected Archos’s claim, stating that it had failed to prove that Philips’s offer had not been FRAND and that its application for an injunction had been an abuse of dominance. The Court stated that Philips had not failed to enter into effective negotiations and that, in fact, it had been Archos that had prevented a solution from being reached, evidenced by the fact that during the negotiations preceding the Huawei judgment—which shifted the burden of making an offer from the SEP user to the rights holder—Archos had failed to make an offer. Furthermore, Archos had told Philips that it would have to take legal action if it wanted higher royalty fees, thereby demonstrating an unwillingness to enter negotiations.

The Court also noted that Archos’s low margins did not necessarily mean that the offer made by Philips had not been FRAND.

Archos therefore failed to establish that Philips’s conduct had been in breach of the ECJ’s decision in Huawei. The claim was dismissed, and Archos was ordered to pay the legal costs.

Petitions Seeking CBM Review Continue Uphill Battle After Unwired Planet

In a series of cases addressing the standard for initiating a covered business method (CBM) review, both the US Court of Appeals for the Federal Circuit and the Patent Trial and Appeal Board (PTAB) reached the same conclusion, finding the patents not eligible for CBM review. Secure Axcess, LLC v. PNC Bank National Association, Case No. 16-1353 (Fed. Cir., Feb. 21, 2017) (Plager, J) (Lourie, J, dissenting); Twilio Inc. v. Telesign Corporation, Case No. CBM2016-00099 (PTAB, Feb. 27, 2017) (Arbes, APJ); Google Inc. v. Klaustech, Inc., Case No. CBM2016-00096 (PTAB, Feb, 27, 2017) (Zecher, APJ). These decisions come on the heels of the Federal Circuit’s Unwired Planet decision, where the Court found Unwired Planet’s patent to be ineligible for CBM review because the PTAB improperly used an overly broad definition of a CBM patent (IP Update, Vol. 19, No. 12).

In Secure Axcess, the patent at issue relates to computer security with a focus on authenticating a web page. The PTAB instituted CBM review of Secure Axcess’s patent, explaining that “because the patent is directed to solving problems related to providing a web site to customers of financial institutions . . . , the patent covers the ancillary activity related to a financial product or service.” The PTAB also reasoned that the patent disclosed a need by financial institutions to ensure that customers are confident that a financial institution’s web page is authentic. In its final written decision, the PTAB maintained that Secure Axcess’s patent was subject to CBM review. Secure Axcess appealed.

On appeal, the Federal Circuit reversed the PTAB, concluding that “the statutory definition of a CBM patent requires that the patent have a claim that contains . . . a financial activity element.” The Court explained that Congress intended the CBM program to be more limited in scope, and that a broad reading of the statute would allow any patent to qualify for CBM review if it claimed a method or corresponding apparatus for performing any operations that happen to be used in “the practice, administration, or management of a financial product or service.” According to the Court, to find otherwise would give the CBM program “a virtually unconstrained reach.” In this case, as part of its broader discussion of what is a “financial product or service,” the PTAB concluded that “[t]he method and apparatus claimed by the [] patent perform operations used in the practice, administration, or management of a financial product or service and are incidental to a financial activity” (emphasis in original). Citing Unwired Planet, the Court explained that the phrase “incidental to a financial activity” is not part of the statutory definition of a CBM patent. Thus, by expanding the definition, the PTAB reached beyond the question of whether the claims, as understood in light of the written description, met the statutory definition. For these reasons, the Court vacated the PTAB’s ruling and remanded the case back to the PTAB.

In dissent, Judge Lourie argued that the claims of the patent are directed to “a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service” (emphasis in original). He also argued that the patent met the statutory definition for a “financial product or service” because of the discussion in the specification regarding specific applications in the management of a financial service. Judge Lourie acknowledged that the term “financial” does not appear in the patent claims, but argued that should not decide the outcome because, as a matter of patent law, claims are not required to recite uses of products.

In Telesign, the PTAB denied institution of a CBM review of a patent directed to the verification of user identity during an online registration process. The PTAB determined that the claims of the challenged patent failed to meet this definition. Citing the Federal Circuit decision in Unwired Planet, the PTAB explained that the challenged patent must have at least one claim that contains “a financial activity element” to be eligible for CBM review. In this case, the PTAB found the words “service” and “notification event,” as used in the claims, to be “generic, context-neutral terms, without any express or implicit connection to financial products or services.” Even though the PTAB agreed with the petitioner that the specification describes embodiments pertaining to finance-related services, the specification does not indicate that such embodiments are limited to finance-related activities. Rather, the specification describes the embodiments in contexts beyond those that are financial in nature.

In Klaustech, Google filed a petition challenging claims of Klaustech’s patent directed to internet advertising with centralized control of ad content being presented at a browser. Before the patent owner’s preliminary response, the PTAB afforded the petitioner an opportunity to file a paper in view of the Federal Circuit’s decision in Unwired Planet. After considering the issues, the PTAB declined to institute CBM review, finding that the patent did not include any claim that satisfied the financial prong of the CBM patent eligibility test. The PTAB also considered Secure Axcess, but found that that case did not alter the final outcome or analysis, concluding it was consistent with Unwired Planet.

The PTAB explained that the CBM patent eligibility test is focused on the claim language and requires determining whether the claims recite explicit or inherent terminology or limitations that are financial in nature. The PTAB was not persuaded by petitioner’s argument that the claims, when read in light of the specification, are directed to a CBM, explaining that the examples in the specification were permissive and did not limit the scope of the claims to being financial in nature. Although the PTAB acknowledged that internet advertising involves the sale of ad space, it concluded that the fact that a sale has occurred or may occur is not sufficient to transform a patent into a CBM-eligible patent when the challenged claims neither recite a sale nor are otherwise directed to the practice, administration or management of a financial product or service.

Practice Note: Going forward, petitioners seeking CBM review should be careful to make a showing that the challenged patent claims specifically relate to finance, since, in the wake of Unwired Planet, the PTAB is giving significant scrutiny to the “financial product or service” aspect of the CBM definition.

Mixed Results: Federal Circuit’s Intervening § 101 Determination Faces PTAB Dissent

After the US Court of Appeals for the Federal Circuit addressed the very same issue and patent, the Patent Trial and Appeal Board (PTAB) reached a split decision, finding the claims to be patent eligible under § 101 despite new characterizations of the abstract idea and new arguments from the patent owner. IBG LLC v. Trading Techs. Int’l., Inc., Case No. CBM2015-00182 (PTAB, Feb. 28, 2017) (Plenzler, APJ) (Petravick, APJ, dissenting in part).

The patent at issue is directed to a user interface for an electronic trading system that allows a remote trader to view trends for an item. The patent owner asserted this patent against several defendants, who in turn sought covered business method (CBM) patent reviews in America Invents Act proceedings at the PTAB. One of the earlier cases resulted in a determination by the PTAB that the asserted claims were directed to patent-ineligible subject matter under § 101. On appeal of that earlier case, the Federal Circuit reversed and issued a non-precedential decision finding the claims patent eligible. In view of the Federal Circuit’s decision, the PTAB in the instant case allowed further briefing on the impact the Federal Circuit’s decision.

Addressing the patent-eligibility issues in the instant case, petitioner attempted to characterize the abstract idea differently than the Federal Circuit articulated it. The majority, however, found “no persuasive explanation” as to why petitioner’s alternative characterization of the abstract idea would cause the PTAB to deviate from the Federal Circuit’s prior reasoning. Petitioner also argued that the claims were patent ineligible because they were directed to a transitory, propagating signal. The majority again disagreed, finding that the claim limitation requiring a “computer readable medium having program code recorded thereon” meant that the claims were directed to a fixed, non-transitory medium. Thus, the majority adopted the Federal Circuit’s reasoning and determined that petitioner failed to establish that the claims were patent ineligible.

The dissent disagreed that the claims of the patent were directed to patent-eligible subject matter, arguing that the Federal Circuit’s non-precedential decision should not control the outcome of the present proceeding. According to the dissent, the Federal Circuit has never determined whether the question of patent-eligible subject matter is a pure question of law or a mixed question of law and fact; if the eligibility question is based on underlying facts, then the new evidence developed as part of the record in the instant proceeding has the potential to control the ultimate determination. In this case, the dissent would have found the claims to be directed to the abstract idea of “placing an order based on observed (plotted) market information,” which the dissent considered as nothing more than observing conventional trading—something that could be performed mentally or with pen and paper. In addition, because the claims lacked specific improvements directed to how the basic claimed steps of “selecting an order” and “sending an order” would be accomplished, the dissent would have found that the claims failed to provide something “significantly more” than the abstract idea itself.

University Trademark Licensing Denial Goes up in Smoke

The US Court of Appeals for the Eighth Circuit affirmed the district court’s decision that a university licensing authority violated the First Amendment when refusing to approve use of the university’s trademarks on t-shirts incorporating a marijuana leaf design. Gerlich et al. v. Leath et al., Case No. 16-1518 (8th Cir., Feb. 13, 2017) (Murphy, J).

Iowa State University (ISU) has about 36,000 students and about 800 officially recognized student organizations. One of these student organizations, the National Organization for the Reform of Marijuana Laws (NORML ISU), produced t-shirts and other items to promote its cause. All student groups are required to get approval from the ISU trademark licensing office in order to use ISU’s trademarks, and NORML ISU received such approval. NORML ISU’s t-shirts incorporated the university’s trademark and a marijuana leaf design.

In 2012, the Des Moines Register published an article about legalization of marijuana in Iowa, featuring a photo of the president of NORML ISU wearing the t-shirt with the university’s trademark and the marijuana leaf design. After the article was published, ISU informed NORML ISU that approval to use ISU’s trademarks had been rescinded because the design suggested that ISU itself supported the legalization of marijuana. Later, ISU revised its trademark guidelines to provide that no designs would be approved that suggested promotion of (1) dangerous, illegal or unhealthy products, actions or behaviors, or (2) illegal or unhealthful drugs and drug paraphernalia. Following the revisions to the guidelines, administrators at ISU rejected two t-shirt designs submitted by NORML ISU because of the incorporation of the marijuana leaf design. NORML ISU filed a complaint against four of the administrators at ISU, alleging violations of its First Amendment rights, among other things.

The district court concluded that ISU’s trademark licensing practice discriminated against NORML ISU based on the organization’s pro-marijuana views, holding that ISU “took action specifically directed” at NORML ISU. The ISU administrators appealed.

On appeal, the Eighth Circuit confirmed the district court’s decision, concluding that “ISU created a limited public forum when it made its trademarks available for student organizations to use if they abided by certain conditions.” ISU’s “rejection of NORML ISU’s designs discriminated against that group on the basis of the group’s viewpoint.” The Court further held that ISU’s “discriminatory motive is evidenced by the unique scrutiny defendants imposed on NORML ISU after the Des Moines Register article was published.” For example, NORML ISU was required to obtain approval of its designs from the administrators before submitting the designs to ISU’s trademark licensing office. Moreover, NORML ISU is the only student organization that had its trademark application denied for fear that ISU would be seen as endorsing a political cause.

No False Advertising Where There Is No Injury or Statements Are Opinions

Addressing the standard for violating the Lanham Act’s false advertising provisions, the US Court of Appeals for the Fourth Circuit affirmed a district court’s grant of summary judgment for the defendant, finding that the plaintiff failed to establish the necessary elements of a false advertising claim for any of the challenged statements. Verisign, Inc. v. XYZ.com LLC, Case No. 15-2526 (4th Cir., Feb. 8, 2017) (Harris, J).

Verisign operates the .com and .net generic top-level domains (gTLDs). XYZ.com LLC, a competitor, operates the .xyz gTLD. Verisign sued XYZ and its CEO, Daniel Negari, over a series of advertising statements that the court classified into two categories: (1) those touting the popularity of the .xyz gTLD, and (2) those warning about the shortage of available .com domain names. In the first category, Verisign challenged a statement that appeared in an XYZ blog post stating that .xyz is “the most used new gTLD” and that it had “received the most registrations of all new gTLDs.” Following an NPR interview with Negari in which the reporter stated, “you could try to become the next .com,” XYZ published a blog post titled “.xyz – the Next .com.” In the second category of challenged claims, Verisign challenged Negari’s statement during the NPR interview that “all of the good [.com] real estate is taken. The only thing that’s left is something with a dash or maybe three dashes and a couple numbers in it.” Verisign also took issue with another XYZ blog post, which stated, “Did you know that 99% of all registrar searches today result in a ‘domain taken’ page?” as well as an XYZ advertisement on YouTube that stated, “With over 120 million .coms registered today, it’s impossible to find the domain name that you want.”

Verisign sued, claiming the statements violated the Lanham Act’s false advertising provisions. To prevail on its claims, Verisign would have to establish that (1) XYZ made a false or misleading statement of fact about its or Verisign’s product(s), (2) the misrepresentation is material, (3) the misrepresentation deceives (or has a tendency to deceive) consumers, (4) the statement was made in commerce, and (5) Verisign has been (or is likely to be) injured as a result. The district court granted XYZ’s motion for summary judgment, finding that (1) Verisign could not show that any of the challenged statements were false or misleading, (2) there was no evidence to show that the claims were material or had deceived consumers, and (3) Verisign failed to demonstrate that it suffered any damages. Verisign appealed.

The Fourth Circuit affirmed the summary judgment with respect to the first group of challenged statements on the ground that Verisign had not established that it suffered any injury. Specifically, the Court upheld the district court’s decision to exclude Verisign’s expert report on damages for failing to show a causal link between XYZ’s statements and diverted domain name registrations. For the second group of challenged statements, the Court also agreed with the district court that the challenged statements were merely nonactionable opinions or puffery. The Court specifically cited the word “you,” stating, “Whether an anonymous ‘you’ can find the domain name of his or her choosing is not something that can be proven true or false.” Furthermore, “what counts as a ‘good’ domain name is a matter of opinion, not fact,” and “when it comes to spoken statements like Negari’s, which may be offered more casually than their written counterparts, we must take care not to label as ‘literally false’ what really is no more than a colloquial exaggeration, readily understood as much.” For those statements that were factual in nature, namely that “99% of all registrar searches today result in a ‘domain name taken’ page,” Verisign admitted that the statistic was verifiably true and had not presented any evidence of consumer confusion, which would be necessary for Verisign to successfully argue that the statement was verifiably true but misleading.

Downloading Pirated Software Without Installing It May Constitute Infringement

Addressing the de minimis requirement of copyright infringement and the ownership of a software program’s output, the US Court of Appeals for the Ninth Circuit determined that downloading pirated software was not a de minimis act and could constitute copyright infringement even where the pirated software was never installed. The Ninth Circuit further explained that there was no copyright in the output of a software program, unless the software (as opposed to the user) was the primary author of that output. Design Data Corp. v. Unigate Enterprise, Inc., Case No. 14-16701 (9th Cir., Feb. 9, 2017) (Hawkins, J).

Unigate creates models of steel components in two- and three-dimensional CAD files using contractors in China, then sells the models to clients in the United States. Unigate advertised that it had the ability to provide its services using a CAD software program owned by Design Data. However, Unigate never purchased a license to the Design Data program and instead downloaded an unauthorized “cracked” copy of the program that allowed individuals to use the Design Data software without a license. Unigate maintained that it merely downloaded a “free demo” of the Design Data software and did not know that it was a “cracked” copy. However, at least one of Unigate’s Chinese contractors used the unauthorized version of Design Data’s software to produce CAD files.

Unauthorized use of a copyrighted work is not actionable unless it is “significant enough to constitute infringement.” The district court found that Unigate’s actions were de minimis and granted summary judgment of no copyright infringement with respect to the download. Design Data appealed.

The Ninth Circuit reversed, finding that Unigate’s actions were not de minimis and could therefore support a claim of copyright infringement. The Court noted that Unigate intentionally downloaded a copy of Design Data’s software and three patches that allowed Unigate to “crack” the software and use it without authorization. Unigate’s computers also contained files generated by the Design Data software, and Unigate advertised to its customers that it was able to use the Design Data software. Even though there was no evidence that Unigate installed the Design Data software, Unigate’s actions, when taken together, were significant enough to constitute copyright infringement.

The Ninth Circuit also determined that Design Data did not own the output of the Design Data software. Some cases suggest that the owner of the copyright in a computer program may also own the copyright in the program’s output when the program “does the lion’s share of the work” in producing the output. This would be the case, for example, when the user’s input is so marginal that the output reflects the work of the computer program rather than the user. Here, Design Data showed that Unigate imported and distributed output files from the Design Data software, but Design Data did not provide evidence that the software, rather than the user, produced the output. Design Data thus failed to prove that it held the copyright in the output files and could not prove copyright infringement by those output files.

No Common Law “Public Performance Right” for Broadcast of Pre-1972 Recordings

The US Court of Appeals for the Second Circuit agreed with the New York Court of Appeals that there is no New York State common law “right of public performance” for pre-1972 recordings that is equivalent to federal copyright protection. Flo & Eddie v. Sirius XM Radio, Inc. et al., Case No. 15-1164 (2d Cir., Feb. 16, 2017) (per curium).

Former recording artists Flo & Eddie (F&E) maintain rights to songs by the 1960s group The Turtles (e.g., “Happy Together,” “She’d Rather Be With Me”). F&E brought a class action suit in the Southern District of New York alleging that Sirius XM Radio infringed its common law copyright protection for sound recordings through the digital transmission of pre-1972 songs. F&E sought millions of dollars in past and future royalties for songs recorded prior to February 15, 1972, the date legislation was amended to confer federal copyright protection.

Throughout the litigation, F&E argued that despite the lack of federal copyright protection for pre-1972 sound recordings, New York common law provides an equivalent “right of public performance,” and the common law protections should require payment of royalties on digital transmission (i.e., a “public performance”) for songs recorded before the federal copyright protections became available.

The district court found no clear answer under New York law as to whether the exclusive rights of sound recording owners include a right of public performance. The question was therefore certified for interlocutory appeal to the Second Circuit, which in turn certified the question to the New York Court of Appeals, asking the state’s highest court to answer whether the state had “a right of public performance for creators of sound recordings under New York law and, if so, what was the nature and scope of that right.”

Following review of the history of common law copyright protection in sound recordings, the New York Court of Appeals concluded that common law does not protect public performance of songs recorded prior to 1972. In other words, the right F&E sought to enforce did not exist under the limited common law protections available in New York, as New York law only conferred protection against unauthorized reproduction of a work until it was published (thereby triggering the federal copyright statute). In view of the respective roles of the judiciary and the legislature, the New York Court of Appeals declined to create a common law right of public performance for pre-1972 sound recordings.

Practice Note: The Second Circuit decision settles the issue presented in Sirius’s favor. The practical effect of the Second Circuit’s judgment is that radio broadcast companies are not required to pay new royalties in order to play songs recorded before 1972. Courts in other jurisdictions (such as California and Florida) are currently considering whether the laws of those states give rise to any right of public performance for pre-1972 sound recordings.

ITC Sanctions for “Staggering” Destruction of Evidence Upheld

Addressing the imposition of sanctions for spoliation in a US International Trade Commission (ITC) case, the US Court of Appeals for the Federal Circuit upheld the ITC’s imposition of default judgment sanctions and an exclusion order for the willful destruction of evidence, twice citing the administrative law judge’s characterization of the behavior as “gross bad faith.” Organik Kimya, San. Ve Tic. A.S. v. ITC, Case No. 15-1774 (Fed. Cir., Feb. 15, 2017) (O’Malley, J).

The case relates to trade secrets for opaque polymers, hollow spheres that are added to paint to increase its opacity. Dow filed an ITC complaint seeking an investigation into Organik Kimya’s product based on infringement of four patents. During the course of discovery, Dow added trade secret misappropriation claims after discovering that Organik may have worked with three former Dow employees to develop its opaque polymers.

Dow sought discovery related to the three former employees and, in the process, “discovered spoliation of evidence on a staggering scale.” The list of evidence destroyed is extensive, but it includes use of specialized software to wipe a laptop hard drive after the ITC authorized Dow to review it, physically destroying other computer equipment, and “accidentally” losing a laptop and external drives in a rest stop bathroom (shudder quotes in original). As a result, the ITC imposed a default judgment sanction on Organik, as well as a 25-year exclusion order. Organik appealed.

The Federal Circuit affirmed both the default judgment sanction and the exclusion order. The court determined that the ITC was within its authority to impose a default judgment sanction for non-compliance with a discovery order. The Court acknowledged that such a sanction is extreme and reserved for only the most serious of cases. However, the Court also noted that sanctions are reviewed only for abuse of discretion, and that in this case the ITC made numerous factual findings supporting its determination. The Court further noted that this case falls “squarely” within the type of conduct that merits default judgment, although not all discovery non-compliance would do so.

In terms of the ITC’s 25-year exclusion order, Organik challenged the length of the order, which was intended to last as long as it would take to independently develop the misappropriated trade secrets. Again the Federal Circuit affirmed the ITC, noting that the ITC found that Dow’s expert credibly testified that it would take Organik 15 to 25 years to develop the technology in question and Organik’s only arguments to the contrary were based on re-litigating the merits of the trade secret dispute it had already lost.