Supreme Court on Evaluation of Claims to Computer-Implemented Inventions under 35 U.S.C. § 101
Margaret M. Duncan
The Supreme Court of the United States has now confirmed that while computer-implemented inventions, such as computer software, remain eligible subject matter for patent protection, the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. To be patent eligible, the claims must recite additional features or steps that are more than “well-understood, routine, conventional activities” to avoid the danger that a claim to a computer-implemented invention will effectively monopolize an abstract idea. Alice Corporation Pty. Ltd. v. CLS Bank International et al., Case No. 13-298 (Supr. Ct., June 19, 2014) (Thomas, Justice).
Petitioner Alice Corporation is the assignee of patents that disclose a method for mitigating settlement risk. CLS Bank filed a declaratory judgment action that it did not infringe the Alice patents and that the patents were invalid, inter alia, under 35 U.S.C. § 101.
The patents at issue include method, computer-readable media and system claims. The claims recite use of a computer as part of the claimed steps or elements.
Following the Supreme Court’s 2010 decision in Bilski v. Kappos, the district court agreed with CLS that all claims (method, computer-readable media and system claims) were patent ineligible under § 101, because they claimed the abstract idea of “employing a neutral intermediary to facilitate simultaneous exchange of obligations in order to minimize risk.” On appeal, the U.S. Court of Appeals for the Federal Circuit in a divided panel decision (Linn, J.), reversed the district court and found all claims to be patent eligible because it was not “manifestly evident” that the claims covered an abstract idea. IP Update, Vol. 15, No. 7.
Shortly thereafter, the Federal Circuit, sitting en banc, issued a per curiam decision reversing the three-judge panel majority decision and affirming the district court’s decision, finding all claims to be patent ineligible. A five-member plurality (Lourie, J., joined by Judges Dyk, Prost, Reyna and Wallach) found all claims patent ineligible as abstract ideas. IP Update, Vol. 16, No. 5. Judge Lourie stated that Alice’s claims “draw on the abstract idea of reducing settlement risk by effecting trades through a third-party intermediary,” and the use of a computer to maintain, adjust and reconcile shadow accounts added nothing of substance to the abstract idea.
In a portion of Chief Judge Rader’s opinion joined by Judge Moore, Judge Rader agreed with the conclusion of Judge Lourie’s plurality opinion that the method and computer-readable media claims were patent ineligible as abstract ideas. In another portion of Chief Judge Rader’s opinion, joined by Judges Linn, Moore and O’Malley, unlike Judge Lourie’s plurality opinion, Chief Judge Rader would have found that the computer system claims were patent eligible, with Judge Moore reaching the same conclusion in her separate opinion.
Judge Newman argued that all of Alice’s patent claims (method, computer-readable media and system claims) are patent eligible. Judges Linn and O’Malley reached the same conclusion in a separate opinion.
The Supreme Court granted certiorari to consider the question of “[w]hether claims to computer implemented inventions—including claims to systems and machines, processes, and items of manufacturer—are directed to patent eligible subject matter within the meaning of 35 U.S. C. § 101 as interpreted by this Court?” IP Update, Vol. 16, No. 12.
Supreme Court Decision
In its unanimous decision, the Supreme Court affirmed the Federal Circuit’s per curiam decision, finding all claims patent ineligible. Justice Thomas noted “the “important implicit exception” to § 101 that laws of nature, natural phenomena and abstract ideas are not patent eligible, citing the 2012 Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics. IP Update, Vol. 16, No. 6. Justice Thomas reminded us that the Supreme Court has “interpreted § 101 and its predecessors in light of this exception for more than 150 years” and pointed out that “the concern that drives this exclusionary principle is one of pre-emption,” citing Bilski and concluded that “upholding the patent ‘would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.’”
Citing the 2012 Supreme Court decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc. (IP Update, Vol. 15, No. 3), Justice Thomas emphasized that patent law should not “inhibit further discovery by improperly tying up the future use of these building blocks of human ingenuity.” However, he cautioned that “[a]t the same time, we tread carefully in construing this exclusionary principle lest it swallow all of patent law” because “[a]t some level, ‘all inventions … embody, use, reflect upon, or apply laws of nature, natural phenomena, or abstract ideas.’”
Justice Thomas next discussed the “framework” set forth in Mayo for distinguishing patents that claim laws of nature, natural phenomena and abstract ideas from those that claim “patent-eligible applications of those concepts.” First, a court must determine whether the claims at issue are directed to one of those patent-ineligible concepts. If so, the court next considers the elements of each claim, individually and as an ordered combination, to determine whether it recites additional elements that “transform the nature of the claim into a patent-eligible application.” As Justice Thomas noted “[w]e have described step two of the analysis as a search for an ‘inventive concept’—i.e.,an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.’”
The Supreme Court rejected Alice’s argument that abstract ideas should be limited to preexisting, fundamental truths that exist in principle apart from any human action and found that Alice’s claims were not patent eligible:
It follows from our prior cases, and Bilski in particular, that the claims at issue here are directed to an abstract idea. Petitioner’s claims involve a method of exchanging financial obligations between two parties using a third-party intermediary to mitigate settlement risk …
Like the risk hedging in Bilski, the concept of intermediated settlement is “a fundamental economic practice long prevalent in our system of commerce.”
Turning to “step two” of the analysis, Justice Thomas considered whether Alice’s claims contained something (more than the abstract idea) sufficient to render the claims patent eligible. He found they did not:
Because the claims at issue are directed to the abstract idea of intermediated settlement, we turn to the second step in Mayo’s framework. We conclude that the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent-eligible invention.
Justice Thomas explained next that a claim that recites an abstract idea must include “additional features” to ensure the claim is more than a drafting effort designed to monopolize the abstract idea, and transformation into a patent-eligible application requires more than simply stating the abstract idea while adding the words “apply it.” The Supreme Court also found that introduction of a generic computer into the claims does not alter the analysis in the second step of the Mayo analysis and is not enough to convert a patent-ineligible abstract idea into a patent-eligible invention: “The relevant question is whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer. They do not.”
Justice Sotomayor, in her concurring opinion (joined by Justices Ginsburg and Breyer), would have found that all claims to business methods are patent ineligible: “I adhere to the view that any ‘claim that merely describes a method of doing business does not qualify as a ‘process’ under § 101.’” However, she concurred with the majority opinion by Justice Thomas that the claims at issue are drawn to an abstract idea and therefore joined the opinion of the court.
Practice Note: In the aftermath of its decision in Alice Corp., the Supreme Court granted certiorari in the long-pending petition in the case of Ultramercial LLC v. Hulu LLC, a case in which the Federal Circuit reversed a district court and found the claimed subject matter to be patent eligible (IP Update, Vol. 16, No. 7) and remanded the case back to the Federal Circuit (for the second time) to be considered in view of Alice Corp.
In addition the U.S. PTO issued new post-Alice instructions for examiners, instructing examiners to apply the following Mayo guidelines to all inventions:
- Alice Corp. establishes that the same analysis should be used for all types of judicial exceptions, whereas prior USPTO guidance applied a different analysis to claims with abstract ideas (Bilski guidance in MPEP 2106(1I)(B)) than to claims with laws of nature (Mayo guidance in MPEP 2106.01).
- Alice Corp. also establishes that the same analysis should be used for all categories of claims (e.g., product and process claims), whereas prior guidance applied a different analysis to product claims involving abstract ideas (relying on tangibility in MPEP 2106(Il)(A)) than to process claims (Bilski guidance).
Federal Circuit Orders Stay Pending Completion of CBM Review
Applying § 18(a)(1) of the America Invents Act (AIA) to an issue of first impression, a divided panel of the U.S. Court of Appeals for the Federal Circuit reversed a district court, ordering a stay of the district court litigation pending resolution of a post-grant CBM review proceeding before the Patent Trial and Appeal Board (PTAB). VirtualAgility, Inc. v. Salesforce.com, Inc. et al., Case No. 14-1232 (Fed. Cir., July 10, 2014) (Moore, J.) (Newman, J., dissenting).
Although the matter was interlocutory, the Federal Circuit heard the appeal since a party has an immediate interlocutory right to an appeal of the district court’s decision to grant or deny a decision pending review of the validity of the asserted claims under the Transitional Program for Covered Business Method Patents (CBM review).
VirtualAgility asserted its patent against a group of defendants. Four months later, one of the defendants, Salesforce, filed a petition with the PTAB requesting CBM review of the asserted claims. The defendants moved to stay the district court proceedings. While the motion to stay was pending, the PTAB granted-in-part the Salesforce petition, reasoning that the asserted claims were more likely than not patent ineligible under § 101 and anticipated under § 102. Several months later the district court denied Salesforce’s stay motion, explaining that, given the thorough U.S. Patent and Trademark Office examination memorialized in the prosecution history, it was unlikely the PTAB would find the claims directed to ineligible subject matter or anticipated.
The Panel Majority
The majority opinion declined to analyze one of the two issues argued on appeal, i.e., whether the standard of review should be de novo or abuse of discretion. The defendants had petitioned the Federal Circuit to review the denial of the stay under the de novo standard, while VirtualAgility contended that the district court’s decision was entitled to deference. The Federal Circuit ultimately declined to resolve the dispute surrounding the standard of review, but did conclude that the district court’s analysis was legally erroneous under the higher abuse of discretion standard.
On the substantive issue, i.e., of whether a stay should have been granted, the Federal Circuit focused on the four factors set forth in the AIA that control whether a court should grant a stay:
- whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;
- whether discovery is complete and whether a trial date has been set;
- whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and
- whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.
The panel disagreed with the district court’s conclusion as to each of the four factors. Judge Moore explained that the district court has “no role” in reviewing the PTAB’s determinations regarding claims that are subject to CBM review. In effect, a district court’s contrary reading of the claims or prosecution history is not relevant under the AIA scheme. Setting aside the district court’s independent assessment, the majority concluded that the PTAB’s patentability findings could simplify the issues in the case if claims were invalidated, and further, a stay of the district court proceedings would promote judicial economy. The majority did not express any opinion as to whether it was preferable for a district court to rule on a motion to stay before or after the PTAB decided to conduct a CBM review, yet based on the facts of the case, agreed with the defendants that the PTAB’s intervention during the early stages of the litigation weighed in favor of a stay. Lastly, the majority explained that while competition between the litigants can prejudice a patentee alleging infringement if the case is stayed, in this case there was no direct competition. Acknowledging that evidence of direct competition was not required to analyze prejudice to the nonmoving party, the majority emphasized consideration of the totality of the circumstances—including VirtualAgility’s decision not to pursue a preliminary injunction—in concluding that the district court erred in finding that the patentee would be unduly prejudiced by a stay. On remand, the district court was instructed to stay the litigation pending the outcome of the CBM review.
In dissent, Judge Newman characterized the majority’s rationale as a “near automatic grant of litigation stays” that will add delay to resolution of disputes and intrudes upon the deference owed to a trial court to manage its docket. Judge Newman analogized the issues in this case to those discussed by the Supreme Court of the United States in Highmark v. Allcare Health Mgmt. Sys., (IP Update, Vol. 17, No. 5), maintaining that the district court is best positioned to balance the interests of the parties and the court. Taking each of the four factors the district court considered in turn, Judge Newman explained her view that the district court consistently applied relevant precedent and did not abuse its discretion.
Practice Note: The guidance provided in the majority decision seems to compel the grant of a motion to stay under the AIA in a multitude of post-grant review circumstances, especially when the patentee is a non-practicing entity and CBM review is instituted early in the case. In cases where an accused infringer is considering filing a petition for some form of post-issuance review with the PTAB, parties are now well advised to do so as early as possible and before the district court has substantively invested resources in the litigation.
Statutory Right to Appeal Does Not Bypass Article III Standing Requirements
K. Nicole Clouse, PhD
The U.S. Court of Appeals for the Federal Circuit dismissed an appeal from the Patent Trial and Appeal Board (the Board) on the grounds that the appellant, a public interest group, did not establish sufficient injury in fact to confer Article III standing. Consumer Watchdog v. Wisconsin Alumni Research Foundation, Case No. 13-1377 (Fed. Cir., June 4, 2014) (Rader, J.).
Consumer Watchdog is a public interest group that describes itself as “providing a voice for taxpayers and consumers in special-interest-dominated public discourse, government and politics.” It initiated an inter partes reexamination of a Wisconsin Alumni Research Foundation (WARF) patent directed to embryonic stem cells, alleging that WARF’s “broad and aggressive” enforcement of this patent allows WARF to preempt all research using embryonic stem cells. After the Board upheld the claims in reexamination, Consumer Watchdog appealed.
Finding that Consumer Watchdog failed to demonstrate that it suffered a concrete and specific “injury in fact”—one of the three requirements for standing in an Article III court—the Federal Circuit dismissed the appeal for lack of standing. The Court found that Consumer Watchdog articulated no actual connection to the claimed subject matter. For example, it does not now or intend to later participate in any potentially infringing activity, and it is not an actual or potential licensee of the patent or a competitor in the relevant field. The Court noted that Consumer Watchdog suffered no injury except that it did not achieve its desired result in the reexamination.
Consumer Watchdog analogized its situation to being denied access to documents under the Freedom of Information Act and Federal Election Campaign Act (FOIA and FECA). The Court, however, distinguished those statutes as conferring substantive rights, denial of which inflicts a concrete injury. According to the Court, the inter partes reexamination statute does no more than confer a right to request reexamination and participate in the proceedings, all of which Consumer Watchdog enjoyed. The statute does not, in contrast, guarantee a party any particular result.
The Court acknowledged that the inter partes reexamination statute created a procedural right to appeal, and that, in such situations, the other two standing requirements of immediacy and redressability can be relaxed. The Court, however, held the requirement of injury in fact “is a hard floor of Article III jurisdiction that cannot be removed by statute.” Finding that Consumer Watchdog did not have a “particularized, concrete stake” in the outcome of the reexamination, but merely a “general grievance,” the Court dismissed the appeal.
The Federal Circuit Reverse a Finding of Anticipation of the PTAB in Inter Partes Reexamination
Addressing a finding of anticipation by the United States Patent and Trademark Office (PTO) Patent Trial and Appeal Board (PTAB) in an inter partes reexamination, the U.S. Court of Appeals for the Federal Circuit reversed the PTAB’s decision, finding that a value cannot “represent” an “amount of time” if there are additional factors, wholly unrepresented by that value, that necessarily impact, or represent, the “amount of time.” In re Rambus, Inc., Case No. 13-1192 (Fed. Cir., June 4, 2014) (Reyna, J.).
Micron Technology (Micron) petitioned for inter partes reexamination at the PTO of a patent owned by Rambus. The patent was directed to a method and system for improving the efficiency of computer memory. The parties disputed before the PTAB whether a prior art patent disclosed “a value that is representative of an amount of time to transpire after which the memory device outputs the first amount of data.” The examiner found the limitation lacking in the art. The PTAB disagreed and found the prior art anticipatory. Rambus appealed.
After oral argument at the Federal Circuit, but prior to the Court’s ruling, Micron withdrew from the case. Given Rambus’ right to appeal the PTAB’s rejection of its patent claims irrespective of Micron’s participation in the appeal, the Federal Circuit found that, despite Micron’s withdrawal, a live controversy regarding the patentability of Rambus’s claims remained before the Court for resolution.
The claims of the patent being reexamined were expired. As a result, the Federal Circuit applied the claim construction principles outlined in Phillips v. AWH Corp., instead of the broadest reasonable interpretation that is typically used in reexamination. Under this standard, the Court found that the PTAB’s conclusion was not supported by substantial evidence.
The Federal Circuit rejected Micron’s argument at the PTAB that the prior art patent disclosed a value that is representative of an amount of time to transpire after which the memory device outputs the first amount of data. The figures of the prior art patent showed a parameter that could be set that resulted in multiplexing, which, according to Micron and the PTAB, caused a delay of known value before data could be transferred over the multiplexed line.
Rambus argued that the figures were simplified, hypothetical illustrations of how the invention of the prior art patent worked in theory and not schematics of how the patented invention actually worked. Rambus pointed out that, in practice, other factors impact the timing of the data transfer that have nothing to do with the parameter identified by Micron and the PTAB. As a result, when the prior art invention is practiced there is no known delay time; rather, it has an indefinite delay time.
The Federal Circuit agreed with Rambus, finding that a value cannot represent an amount of time if there are additional factors that impact the amount of time.
Obviousness Only Requires Reasonable Expectation of Success of One Compound Encompassed by Broad Genus Claims
Addressing the issue of showing a reasonable expectation of success when making obviousness combinations in the context of broad genus claims, the U.S. Court of Appeals for the Federal Circuit reversed a district court’s ruling that the asserted patents were non-obvious, finding that the district court erred by limiting the analysis to one compound covered by the broad claim. Allergan, Inc. v. Apotex Inc., Case Nos. 13-1245; -1246; -1247; -1249 (Fed. Cir., June 10, 2014) (Prost, C.J.) (Chen, J. dissenting-in-part).
The plaintiff-appellee Allergan has FDA approval to sell Latisse®, an ophthalmic solution used to treat eyelash hair loss by stimulating growth of the eyelashes. The defendants-appellants are generic drug manufacturers who filed Abbreviated New Drug Applications (ANDAs) seeking FDA approval to market generic versions of Allergan’s Latisse. Allergan sued defendants for infringement of two patents covering its hair-promoting product. After the district court found that the defendants infringed the patents and that the patents were not invalid, the generic drug makers appealed.
The Federal Circuit reversed the district court’s obviousness ruling. The active ingredient in Latisse is bimatoprost, which is a synthetic prostaglandin-F (PGF” analog. For one of the asserted patents, which claims methods of treating hair loss through administration of a compound selected from the recited genus of PGF analogs, the Federal Circuit found that the claims were invalid in view of a combination of prior art references, one of which disclosed using compounds from a broad class of PGF analogs to promote hair growth.
The district court had concluded that the claims were not obvious based in part on findings that there was no reasonable expectation of success or motivation to use the claimed compounds disclosed in the prior art references to treat hair loss, and also based on evidence of unexpected results achieved with bimatoprost. These factual findings by the district court were in large part based on evidence that one variant disclosed in the prior art reference would have resulted in a person of ordinary skill in the art not having a reasonable expectation of success of promoting hair growth with that compound. The Federal Circuit disagreed.
In reaching its decision, the Federal Circuit did not overturn any of the district court’s factual findings, but instead explained that failure to consider the appropriate scope of the patent’s claimed invention in evaluating the reasonable expectation of success and secondary considerations constitutes a legal error that is reviewed without deference.
The patent covered a broad genus of compounds, including but not limited to the variant disclosed in the prior art reference that the district court relied on. The Federal Circuit stated that the district court failed to make a finding on how the one variant necessarily applied to the reasonable expectation of success for the full scope of the patent’s claimed invention. Accordingly, the Federal Circuit stated that the district court’s findings were not relevant to the patent’s actual claimed invention.
Furthermore, to establish that the evidence of unexpected results was commensurate in scope with the claims, the district court “needed to have found that other embodiments falling within the claim will behave in the ‘same manner.’” In the absence of such evidence, the district court had not made any factual finding “that would diminish the more probative facts supporting a person of ordinary skill’s substantial reasonable expectation of success and motivation to use PGF analogs” to treat hair loss as claimed in the patent.
A Compound Is Obvious Where Only Minor Changes to a Prior Art “Lead Compound” Are Required to Make the Claimed Compound
Addressing the obviousness of a claimed compound where a person of skill would need to make only minor changes to a lead compound to arrive at the claimed invention, the U.S. Court of Appeals for the Federal Circuit affirmed a district court’s ruling, finding that the pharmaceutical was obvious where a skilled artisan would have altered the lead compound of the prior art in the exact same manner suggested by defendant. Bristol-Myers Squibb Co. v. Teva Pharms USA, Inc., Case No. 13-1306 (Fed. Cir., June 12, 2014) (Chen, J.).
Bristol-Myers (BMS) sued Teva for infringing a patent directed to entecavir, a nucleoside analogue with antiviral properties. BMS markets entecavir for treating hepatitis B under the brand name Baraclude. Teva filed an Abbreviated New Drug Application (ANDA) seeking to market a generic version of entecavir accompanied by a Paragraph IV certification. In response, BMS sued for infringement. Teva counterclaimed that entecavir was obvious in view of 2’-CDG, a “lead compound” disclosed in the prior art that differed from entecavir by a single alteration to entecavir’s molecular structure.
The district court found that 2’-CDG was a lead compound based on its potent anti-hepatitis B activity and evidence that many groups and companies have investigated its antiviral properties. The court also found that the structural similarity between 2’-CDG and entecavir, combined with prior art teachings that disclosed other, similar compounds, would have motivated a skilled artisan to modify 2’-CDG to make entecavir. The court concluded that a person of skill would have had a reasonable expectation of success and found the claims to be obvious. BMS appealed.
The Federal Circuit, drawing from detailed evidence and testimony, affirmed the district court and concluded that a skilled artisan would have altered 2’-CDG in exactly the manner that led to entecavir. The Court agreed that the evidence showed that only a minor change to 2’-CDG would have been required to convert it to entecavir and that other prior art provided motivation to do so. According to the Court, the district court properly found strong evidence of obviousness, because the record shows that a skilled artisan would have selected 2’-CDG as a lead compound and made the minor modification to arrive at entecavir.
The Federal Circuit rejected BMS’s argument that 2’-CDG could not have been a lead compound because of its toxicity, a characteristic discovered after the priority date. According to the Court, any such later discovery would not have affected a skilled artisan’s evaluation of the compound at the time of invention, and was thus immaterial. Citing In re Dillon (Federal Circuit, 1990) (en banc), the Court further held that unexpected results do not foreclose an obviousness finding, and it agreed with the district court that the evidence of unexpected results and any other secondary considerations produced in the litigation, did not overcome the strong evidence of obviousness.
Examiner and Board Must Be Consistent in Prior Art-Based Rejections of Similarly-Worded Claims
Addressing the issue of whether the U.S. Patent and Trademark Office’s (PTO) Board of Patent Appeals and Interferences (the Board) erred by rejecting some claims as obvious, but not rejecting other, similarly worded claims using the same rationale, the U.S. Court of Appeals for the Federal Circuit vacated in part, affirmed in part and remanded the Board’s ruling, finding that the PTO should be consistent in making claim rejections and must reject all similarly-worded claims under the same rationale. Q.I. Press Controls, B.V. v. Lee, Case Nos. 12-1630; -1631 (Fed. Cir., June 9, 2014) (Lourie J.).
Quad/Tech, Inc. owned a patent directed to a visual inspection system for printing presses. The patent discloses an imaging system for printing with large rolls of paper that uses an image sensor system containing an optical sensor to inspect the printed pages. Q.I. Press Controls (Q.I. Press) is a developer of optical measure and control systems, including a product that Quad/Tech alleged to infringe the patent in a related case. Q.I. Press initiated an inter partes reexamination of the patent, alleging that the claims would have been obvious over the prior art.
The PTO examiner rejected a first group of claims as being obvious in view of two prior art references and rejected a second group of claims on different grounds, notwithstanding that the second group of claims were similarly worded and directed to similar subject matter as the first group. Quad/Tech appealed to the Board, and the Board affirmed the rejection as to the first group of claims, but allowed the second group of claims. Q.I. Press then appealed to the Federal Circuit.
The Federal Circuit found that the Board’s rejection of the first group of claims was proper. The Court rejected Quad/Tech’s argument that the two references which the examiner used to reject the claims could not be combined because the cited references failed to teach a high intensity illumination system. The Court also rejected Quad/Tech’s argument that Q.I. Press’s statements praising the circular lighting arrangement of its own accused products provided objective evidence of non-obviousness of the patent. Instead, the Federal Circuit found that a skilled person in the relevant field could have combined the cited references to reach the claimed technique, and the secondary considerations of non-obviousness were not persuasive.
With regard to the second group of claims, the Federal Circuit found the same rationale should apply. The Court noted that the Board likely failed to make the rejection because the examiner failed to make it himself, and the Board would have had to enter a new ground of rejection in order to apply the references cited against those claims. As a general rule, the Board is not obligated to do its own research into the prior art and make its own new ground of rejection of claims on appeal. However, when references and rationale for a rejection are already before the Board, the Board owes an obligation … to the public not to permit inconsistent results when a proper challenge to that inconsistency is made on appeal. The Federal Circuit found that, by failing to reject the second group of claims, the Board failed to meet this obligation.
Voluntary and Intentional Applicant Choices are Errors Under the Reissue Statute Only if They Arises from a False or Deficient Understanding of Fact or Law
Alexander P. Ott
Addressing the issue of whether the filing of a terminal disclaimer that rendered a patent unenforceable by the applicants was an error for the purposes of the reissue statute, the U.S. Court of Appeals for the Federal Circuit affirmed a ruling from the U.S. Patent and Trademark Office’s (PTO) Patent Trial and Appeal Board Board), finding that an applicant’s choice is only an error when based on a false or deficient understanding of fact or law. In re Dinsmore, Case No. 13-1637 (Fed. Cir., June 10, 2014) (Taranto, J.).
Inventors Dinsmore and Caruso sought reissue of their patent directed to a miniature x-ray source and assigned it to twX, LLC. During original prosecution, the examiner rejected the claims on the basis of non-statutory obviousness-type double patenting in view of an earlier patent invented by Dinsmore and assigned to another company. The applicants submitted the PTO’s standard terminal disclaimer form, which declares that the resulting patent will only be enforceable when commonly owned with the earlier patent. The PTO examiner withdrew the rejection and granted the patent.
A year later, the inventors sought to reissue all claims under 35 U.S.C. § 251, this time without the terminal disclaimer. The inventors claimed that the terminal disclaimer was ineffective and invalid because it rendered the patent unenforceable, since it was not commonly owned with the earlier patent. The reissue examiner concluded that the inventors’ voluntary and intentional filing of a terminal disclaimer did not constitute an “error” and denied the reissue application. After the Board affirmed, the inventors appealed.
The Federal Circuit rejected the inventors’ argument that the terminal disclaimer was ineffective because it did indeed produce the intended effect of preventing enforcement of the later issued patent unless commonly owned with the earlier patent. The Court also disagreed that the disclaimer was invalid, noting that nothing was missing that was required nor anything included that was forbidden.
As to the inventors’ position that the disclaimer was ineffective in the sense that it did not produce a patent that they themselves could enforce, the Federal Circuit concluded that that was no more than a statement of a now-regretted choice. While the Court did agree that applicant choices can be redressed by the reissue statute, it held that such choices must be based on a false or inadequate understanding about facts or law to constitute the required error. Since the inventors here had not shown or even alleged any misunderstanding—such as a mistaken belief that the patents were in fact commonly owned—the Court held that their decision did not constitute an error under the reissue statute.
Patents / Rule 11 Sanctions
Pre-suit Claim Construction Analysis Must Satisfy Rule 11
Addressing the reasonableness of a pre-filing claim construction analysis in the context of Rule 11 sanctions, the U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s award of Rule 11 sanctions against plaintiff’s counsel, finding that the patent holder based its infringement theory on an untenable claim construction and inadequate infringement investigation. Source Vagabond Sys. Ltd. v. Hydrapak, Inc., Case Nos. 13-1270; -1387 (Fed. Cir., June 5, 2014) (Wallach, J.).
Source Vagabond Systems (Source) owns a patent directed to flexible water reservoirs, such as for storage in a backpack. According to the patent, a hermetic seal is formed by folding the top of the flexible reservoir over a rod and positioning a long sealer clip sideways over the folded reservoir and rod. The sealer clip has a slot big enough for the folded reservoir but not the rod. The pertinent claim element requires the slot to be “narrower than the diameter of the rod” so that the sealer clip is only to be “slidingly mounted sideways over the rod.”
As was clear to the naked eye, the slot of the accused Hydrapak sealer clip was wider than the rod’s diameter. Source’s infringement theory, therefore, hinged on claim construction. Source proposed adding the underlined language to the term: “narrower than the diameter of the rod together with the container folded over it.” Even under this construction, however, Hydrapak’s slot did not meet the narrowness requirement.
After Source filed its complaint, Hydrapak filed a Rule 11 sanctions motion. Within Rule 11’s safe-harbor period, Source filed an amended complaint. Hydrapak filed another Rule 11 motion and moved for summary judgment of non-infringement. The district court granted both motions and sanctioned Source’s counsel. Source appealed.
The Federal Circuit applied the U.S. Court of Appeals for the Second Circuit’s “objective reasonableness” standard for Rule 11 violations. The Court upheld the finding that the pre-suit claim construction analysis did not measure up to the standard required by Rule 11. Source’s proposed construction required adding limitations onto the narrowness requirement of the slot on the sealer clip. However, Source failed to identify any intrinsic support for its proposed additional limitation. Source argued that the proportions in the figures indicate that its construction was objectively reasonable. Figures, however, do not define proportions of claim elements where the specification is silent as to size. The Federal Circuit found that Source’s requisite pre-suit claim construction evaluation was unreasonable and contrary to the canons of claim construction.
The Federal Circuit also found that Source’s pre-suit investigation lacked an adequate evidentiary basis. The Court found that, even in opposing the Rule 11 motion, Source did not provide any product measurements or calculations of the width of Hydrapak’s slot. If challenged, a patent holder must be prepared to explain why it believed—before filing the lawsuit—that it had a reasonable chance to prove infringement. Source failed to provide any such evidence.
Patents / Claim Construction
Lie Still: Claim Construction on Hospital Bed Unduly Limited *Web Only*
Addressing whether there were any reasons to depart from the plain and ordinary meaning of terms in claim construction, the U.S. Court of Appeals for the Federal Circuit reversed and remanded a district court’s summary judgment of non-infringement, finding that the decision was premised on erroneous claim constructions because the district court had improperly limited the terms beyond their plain and ordinary meaning. Hill-Rom Services, Inc. v. Stryker Corp., Case No. 13-1450 (Fed. Cir., June 27, 2014) (Moore, J.) (Reyna, J., dissenting).
Hill-Rom brought suit against Stryker alleging patent infringement of patents directed to hospital beds. The district court issued its claim construction ruling and the parties stipulated to non-infringement based on the construction of four claim terms: “datalink,” “interface board including a processor,” “message validation” and “bed condition message.” After the district court granted summary judgment of non-infringement. Hill-Rom appealed.
The Federal Circuit reversed, explaining that the district court had erred in limiting “datalink” to “a cable.” The district court should have applied the plain and ordinary meaning, because the specification did not support any limiting lexicography or disavowal arguments. Although the specification used the terms “datalink,” “cable” and “serial datalink” to describe the same component in the preferred embodiment without presenting a wireless alternative, the Court found that there was no language indicating that a wired connection was important, essential or necessary. Further, the Court pointed to dependent claims that referred to a “wired datalink” as evidence of claim differentiation, i.e., differentiated from wireless. Hill-Rom’s expert presented the only evidence representing the understanding of one of ordinary skill in the art, which included wireless datalinks. The Federal Circuit ruled that the district court erred in construing datalink to exclude wireless communications in order to enable the claims. Rather, the Court instructed that claim terms should be given their plain and ordinary meaning and not be rewritten to preserve validity.
Turning to “interface board including a processor” claim term, the Federal Circuit concluded the proper construction did not require a “wall interface unit” or receiving messages from a remote location because neither the claims nor the written description included such requirements.
The Court generally agreed with the district court regarding the construction of the term “message validation information,” to the extent that validation meant verifying the message bit by bit, noting that to construe otherwise would exclude the preferred embodiment. However, the Court stated that nothing in the claims or specification limited the term to a single data field, and so the construction should be amended to “one or more fields.”
Finally, the Federal Circuit disagreed with the district court’s construction of “bed condition message,” which it found was incorrectly based on judicial estoppel since the district court improperly relied on statements made by Hill-Rom in the prosecution of a later, unrelated, hospital bed patent application. Further, the Court noted that even those statements by Hill-Rom were not clearly inconsistent with Hill-Rom’s construction of “bed condition message,” and that therefore the plain and ordinary meaning should apply.
In a dissenting opinion, Judge Reyna argued that the Court’s construction of datalink improperly included all data communication now and into the future. In Judge Reyna’s view both the claims and written description emphasize “datalink” as a physical structure. Judge Reyna stated that the majority ignored a subsequently filed application by Hill-Rom that was substantially the same as the patents at issue but for the use of wireless technology.
Patents / Claim Construction and Infringement
On a Plain and Ordinary Meaning of “Embedded” Code in a Web Page *Web Only*
Addressing a district court’s construction of the claim term “embedded” code as code “written into the HTML code of the web page” and the related summary judgment of non-infringement in favor of Yahoo!, the U.S. Court of Appeals for the Federal Circuit affirmed. Augme Techs., Inc. v. Yahoo! Inc., Case Nos. 13-1121; -1195 (Fed. Cir., June 20, 2014) (Moore, J.).
Augme sued Yahoo! for alleged infringement of two related patents directed towards adding functionality, such as advertisements, to a web page. The claims at issue recite an “embedded” first code module that “retrieves” or “initiates retrieval” of a second code module containing the code for the added functionality.
In construing the term “embedded” code, the district court expressly excluded “a code module that is retrieved via external linking.” On appeal, Augme argued that “embedded” code can include “linked code, i.e., code not actually in the web page HTML.” Applying the principle that different claim terms are presumed to have a different meaning, the Federal Circuit disagreed: “[I]f embedded were construed as including code that is not itself written into the webpage, but is rather linked—retrieved and downloaded—then both the first and second code modules would be embedded according to this definition. This would render meaningless the distinction between the embedded first code module and the downloaded or retrieved second code module.” The Federal Circuit added, the “plain and ordinary meaning of embedded code is code written into the HTML code of the web page” and “[c]ode which is incorporated into the web page from another location is not embedded, it is linked.”
After claim construction, the Federal Circuit turned to the question of infringement. The accused Yahoo! systems, RMX and APT, allow web page publishers to obtain “smart tags” so that a web page can display Yahoo!-distributed advertisements. The “smart tags” (alleged first code module) are embedded in the web page. After downloading the web page, the browser executes the smart tag to download “smart code” from the Yahoo! server. The browser then executes the smart code to request an “imp code” (alleged second code module). The returned imp code includes an “ad code” that may include an advertisement or be blank.
Augme’s literal infringement argument was that because the embedded smart tag begins a process that ultimately results in retrieval of the imp code, a jury could conclude that this smart tag initiates the retrieval process.” Rejecting Augme’s position, the Federal Circuit found that in “the accused Yahoo! systems, the embedded smart tag retrieves an intermediary smart code” and concluded that “[b]ecause Yahoo!’s non-embedded smart code initiates retrieval of the alleged second code module, there can be no literal infringement.”
Augme also appealed judgment of no infringement under the doctrine of equivalents (DOE). Having found that “embedded and linked code are opposites,” the Federal Circuit held that “specific exclusion” applied, precluding Augme from arguing that the combination of the embedded smart tag plus separately retrieved smart code could be equivalent to the embedded first code module. The Federal Circuit also faulted Augme’s expert’s analysis under the function-way-result test to show equivalence, finding absent any expert testimony regarding whether the combination of the smart tag with smart code functioned in substantially the same “way” as the embedded first code module.
Identifying Class of Algorithms Insufficient To Satisfy Means-Plus-Function Structure Requirement
Addressing whether a patent specification provided adequate specificity to satisfy indefiniteness scrutiny of a means-plus-function claim, the U.S. Court of Appeals for the Federal Circuit affirmed a district court’s finding that a means-plus-function term “integrator means” rendered asserted claims indefinite, finding that failure to identify corresponding algorithms for computer-implemented means-plus-function terms renders the claim indefinite. Triton Tech of Texas, LLC v. Nintendo of America, Inc., Case No. 13-1476 (Fed. Cir., June 13, 2014) (Moore, J.).
Triton Tech of Texas (Triton) sued Nintendo of America, Inc. (Nintendo) alleging that the wildly successful Wii Remote infringed its patent directed to an input device for a whereby a user could manipulate an object that is represented graphically on a computer screen by moving the input device in three dimensions.
As claimed, the input device included sensors for detecting acceleration and rotation, as well as an integrator means for integrating the measurements by the sensors. A “conventional microprocessor” is programmed to periodically read and numerically integrate the measurements by the motion sensors. The patent did not disclose how numerical integration is performed, only that it is performed by a “conventional microprocessor.”
After the district court concluded that the means plus function “integrator means” rendered the asserted claims indefinite, Triton appealed.
Triton conceded that the integrator means structure was a conventional microprocessor, but argued that use of the phrase “numerical integration” was sufficient disclosure of the algorithm performed because the term was well known to those skilled in the art. The Federal Circuit disagreed, explaining that numerical integration is not an algorithm but instead an entire class of different possible algorithms used to perform integration. Consistent with the Federal Circuit’s ruling in Aristocrat and its progeny, if a function is performed by a general purpose computer or microprocessor, then the patent specification must also disclose the algorithm that the computer performs to accomplish that function. The Court found that the failure to identity the corresponding algorithm for computer-implemented means-plus-function term renders the claim indefinite.
In distinguishing the disclosure in Triton’s patent from acceptable disclosures of an algorithm, the Federal Circuit clarified that “an algorithm can be expressed in many forms, including flow charts, a series of specific steps, mathematical formula, prose and so on. However, merely using the term ‘numerical integration’ does not disclose an algorithm—i.e., a step-by-step procedure—for performing the claimed function.” Moreover, the fact that a person of skill in the art may be able to discern an algorithm cannot save a claim from indefiniteness because a bare statement that known techniques or methods can be used does not disclose structure.
Triton tried to introduce (for the first time on appeal) a new argument supporting a two-step algorithm for the integration function. The Federal Circuit rejected this argument for its untimeliness. Triton, the Court found, waived this argument by failing to raise it with the lower court.
Patents / Settlement Agreements / Antitrust Liability
Contractual Duty to Deal Does Not Equal Antitrust Duty to Deal *Web Only*
Addressing for the first time whether a patent holder under a contractual duty to deal is also subject to an antitrust duty to deal, the U. S. Court of Appeals for the Second Circuit upheld dismissal of a putative antitrust class action challenge to a drug manufacturer’s refusal to fully supply competitors’ requested quantities under patent settlement agreements. In re Adderall XR® Antitrust Litigation, Case No. 13-1232 (2d Cir., June 9, 2014) (Sack, J.).
The defendants, Shire, hold patents covering Adderall XR. Previously, Shire sued generic drug manufacturers Teva and Impax for patent infringement after those manufacturers—seeking U.S. Food and Drug Administration (FDA) approval to produce generic Adderall XR—argued that Shire’s patents were “invalid or will not be infringed.” Shire settled with Teva and Impax in 2006 with variants of the traditional reverse-payment agreement. In these settlement agreements, Teva and Impax agreed to stay out of the Adderall XR market for three years (even if FDA approval came earlier), but unlike a traditional reverse-payment agreement (where the patent holder pays money to the potential entrant), Shire agreed to grant licenses starting in 2009 for making and selling the drug and, if FDA approval had not yet occurred, to supply Teva and Impax’s requirements of unbranded Adderall XR for resale. The 2d Circuit summarized the arrangement as follows: “Shire undertook to give its competitors both the rights and the supplies necessary to participate in the market for [Adderall XR].” By the time Shire’s contractual exclusivity expired, the FDA had not approved either Teva or Impax’s applications, so Teva and Impax began purchasing from Shire. Shortly thereafter, both companies alleged that Shire breached the settlement agreement obligations by refusing to fully fulfil their requirement orders. However, both companies eventually settled with Shire.
In the present case, drug wholesaler and plaintiff Louisiana Wholesale Drug Company (LWD) brought a putative class action against Shire. It alleged antitrust violations stemming from the effect of the supply shortfall on the prices the proposed class of drug wholesalers paid. LWD argued that Shire’s “ordinary breach of contract” became “an unlawful act of monopolization” because, by entering into the agreements, Shire “relinquish[ed] its monopoly control over” Adderall XR vis-à-vis Teva and Impax and thereby created a “duty to deal” with its competitors under the Supreme Court’s 1985 Aspen Skiing decision. Specifically, LWD alleged that Shire artificially inflated prices by holding back some of its supply from generic manufacturers/patent licensees Teva and Impax, from whom LWD purchased Adderall XR. After the district court dismissed the complaint on a R. 12(b)(6) motion to dismiss, LWD appealed.
The 2d Circuit affirmed the district court’s dismissal for failure to state a claim, concluding that LWD’s “allegations amount to the self-defeating claim that Shire monopolized the market by ceding its monopoly” and that “the complaint does little more than attach antitrust ‘labels and conclusions’ to what is, at most, an ordinary contract dispute to which the plaintiffs are not even parties.” The court reasoned that “‘the sole exception to the broad right of a firm to refuse to deal with its competitors’ comes into play only ‘when a monopolist seeks to terminate a prior (voluntary) course of dealing with a competitor’” (emphasis added), and that unlike Aspen Skiing, “the agreements here were explicitly unprofitable—they introduced price competition into a market where none would otherwise have existed” (emphasis in original). As such, the 2d Circuit concluded that “[t]he mere existence of a contractual duty to supply goods does not by itself give rise to an antitrust ‘duty to deal.’”
Practice Note: Last year (while the Adderall case was on appeal), the Supreme Court in F.T.C. v. Actavis found that reverse-payment settlements are not immune from antitrust scrutiny merely because they may “fall within the scope of the exclusionary potential of the patent” at issue and that such agreements are subject to the antitrust law rule of reason. Patent holders should note, therefore, that the 2d Circuit’s holding in Adderall, while it appears to be on firm jurisprudential ground, does not immunize them from all antitrust claims relating to reverse-payment settlement agreements—or, for that matter, from breach of contract claims. In fact, Shire faced (and settled) breach of contract suits from both Teva and Impax. The 2d Circuit expressly based its decision only on “the plaintiff’s theory of the case” (i.e., the alleged existence and violation of an antitrust “duty to deal”) and stressed that it expressed no view regarding “the potentially anticompetitive effects, if any,” of the Shire/Teva/Impax settlement agreements.
Plaintiff Lacks Standing to Enforce Patent When Co-Owner Refuses to Participate in Litigation
Addressing whether standing and joinder are matters dictated by substantive patent law or by Federal Rule of Civil Procedure 19(a), the U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s ruling of no standing, finding that plaintiff STC.UNM could not involuntarily join a patent co-owner in an infringement action. STC.UNM v. Intel Corp., Case No. 13-1241 (Fed. Cir., June 6, 2014) (Rader, J.) (Newman, J., dissenting).
The asserted patent is a continuation in part (CIP) of a parent patent. The parent patent had three inventors who were employed by University of New Mexico (UNM) and one inventor who was employed by Sandia. Two of the UNM inventors of the parent patent went on to file the CIP patent application, but did not claim priority to any earlier-filed application. During the prosecution of the CIP patent, the U.S. Patent and Trademark Office twice rejected its claims for double patenting over the parent patent. As a result, UNM filed a terminal disclaimer specifying that “any patent granted on this instant application shall be enforceable only for and during such period” that the two patents “are commonly owned.” Further, UNM stated that is was the “owner of record of a 100 percent interest in the instant application.” Later UNM assigned its interest in both patents to STC, a wholly owned licensing arm of UNM.
When STC.UNM filed suit against Intel, Sandia claimed it had no ownership interest in the CIP patent. As a result, Intel claimed that the CIP patent was unenforceable for failing to comply with the common-ownership requirement of the terminal disclaimer. STC.UNM disagreed claiming, inter alia, that Sandia had obtained an ownership interest due to the fact that the CIP patent was a continuation in part. Nevertheless, “in an abundance of caution,” STC.UNM assigned an undivided interest in the CIP patent to Sandia. Consequently, Intel then moved to dismiss the case because Sandia refused to join as a party. The district court agreed based on Ethicon v. United States Surgical Corp. (Fed. Cir., 1998), which holds that when a patent is co-owned, a co-owner seeking to enforce the patent must join all other co-owners as plaintiffs to establish standing. STC.UNM appealed.
STC.UNM argued that Sandia should be joined under FRCP 19(a). The Federal Circuit disagreed affirming the dismissal because “rules of procedure shall not abridge, enlarge or modify any substantive right.” The Court explained that while under 35 U.S.C. § 262, a patent co-owner such as STC.UNM could license and commercialize its interest in the patent without its co-owner’s permission, a co-owner cannot be forced to participate in litigation. The Federal Circuit acknowledged that license negotiations with third-parties may lose their “bite” if the target knows that the co-owners are not aligned. Nevertheless, the limits on joinder are necessary to protect a co-owner’s right to not be thrust into costly litigation if its patent is subject to potential invalidation. Furthermore, the rule requiring the participation of all co-owners safeguards against the possibility that each co-owner would subject an accused infringer to a different infringement suit on the same patent.
Practice Note: Joint development agreements—particularly in instances where inventors are required to assign rights to their respective employer—should address whether a co-owner will be contractually obligated to join a co-owner in efforts to enforce the patent rights. Likewise, defendants should carefully analyze the ownership chain of asserted patents—especially when a patent issues from a continuation-in-part application that added inventors who may have different assignment obligations than the parent application.
Patents / Appellate Jurisdiction
No “Plausible Basis” to Establish Federal Circuit Jurisdiction in Transfer From Eleventh Circuit *Web Only*
Addressing whether a declaratory judgment action qualified as a civil action relating to patents for purposes of establishing appellate jurisdiction, the U.S. Court of Appeals for the Federal Circuit transferred an appeal back to the U.S. Court of Appeals for the Eleventh Circuit, finding that the ownership dispute surrounding a dental implant system did not fall within the Federal Circuit’s exclusive appellate jurisdiction. Krauser v. Biohorizons, Inc., Case No. 13-1461 (Fed. Cir., June 4, 2014) (Dyk, J.).
Plaintiff Jack Krauser (Krauser) first sued defendant Biohorizons’ (BHI) predecessor Minimatic in state court and federal district court in 1993. Krauser, a periodontist, designed a dental implant system in 1987 and obtained a patent covering one component of a larger system in 1994. During that time he collaborated with BHI’s predecessor to build prototypes of the dental implant system and authorized the predecessor to pursue marketing and sales of the system in exchange for an agreed-upon royalty. Krauser’s first suits arose out of allegations that BHI’s predecessor was not paying him the royalties he was owed and had sought its own patents covering the dental implant systems that improperly omitted Krauser as a named inventor. Eventually the parties reached a licensing agreement to settle proceedings pending in bankruptcy court in 1996.
Krauser again sued in 2010 alleging that patents issuing between 2000 and 2003 also omitted him as an inventor, and that he had ownership rights in BHI’s commercial dental implant system. During the course of this litigation, Krauser withdrew his claims of inventorship and filed an amended complaint limiting the case to a dispute surrounding whether he had ownership rights in BHI product. The district court, interpreting the 1996 licensing agreement between the parties, found that Krauser had not established any ownership rights and granted summary judgment in favor of BHI. Krauser appealed to the 11th Circuit.
The 11th Circuit accepted BHI’s arguments that the case belonged at the Federal Circuit and transferred without explaining the basis for the transfer. The Federal Circuit recognized that under the law of the case doctrine it was bound to adhere to the directions of the 11th Circuit so long as there was a plausible basis for the transfer decision. However, the Federal Circuit found that it did not have jurisdiction over the case as “arising under any Act of Congress relating to patents.”
The Federal Circuit analyzed the arguments BHI presented to the 11th Circuit. First, because Krauser withdrew the inventorship claim, the Federal Circuit concluded that it was divested of jurisdiction at the time of filing the amended complaint, where the only remaining claim was a non-patent claim for unfair competition. Second, the Federal Circuit applied the Supreme Court’s recent guidance in Gunn v. Minton (IP Update, Vol. 16, No. 7) to reject the proposition that Krauser’s ownership allegations rested on a theory of inventorship that implicated issues of patent law. Third, the Federal Circuit explained that even if Krauser’s remedies under state law were preempted by federal patent law, federal pre-emption was never pled as a defense in the amended answer, thereby precluding the exercise of jurisdiction based on federal patent law. Having assessed all three arguments and seeing no plausible claim on which the Federal Circuit could satisfy itself of its own jurisdiction, the Federal Circuit dismissed the appeal and transferred the matter back to the 11th Circuit.
No Patent; No Federal Jurisdiction *Web Only*
Addressing whether federal courts have jurisdiction over patent disputes prior to issuance of a disputed patent, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s order remanding the case to state court, finding that the federal courts have no authority to adjudicate inventorship with respect to pending patents. CamSoft Data Services, Inc. v. Southern Electronics Supply, Inc., Case No. 12-31013 (5th Cir., June 19, 2014) (Benavides, J.).
CamSoft sued Southern Electronics Supply and Active Solutions in state court, asserting that it had invented and developed a disputed wireless surveillance system. CamSoft alleged that the system was the subject of a pending patent application and sought ownership of the surveillance system and any related intellectual property. The case was removed to district court on the basis of federal question jurisdiction under 28 U.S.C. §§ 1331 and 1338(a), a move opposed by CamSoft. The federal district court found that the allegation of inventorship invoked patent law, giving rise to federal jurisdiction.
The district court presided over the case for three years and resolved various dispositive issues and dismissed others. The district court then requested and reviewed the parties’ briefings on the remaining claims. The court found that the patent issue had been abandoned and sua sponte declined to exercise supplemental jurisdiction over the remaining claims, remanding the case back to state court. Southern appealed the remand to the Federal Circuit. The Federal Circuit transferred the appeal to the 5th Circuit.
The 5th Circuit found that it had jurisdiction over the appeal. Considering whether removal to district court had been proper in the first place, the court analyzed the inventorship issue invoked by CamSoft’s claim to ownership of a pending patent application. Although inventorship raises a substantial question of federal patent law, the relevant statute places limitations on how a plaintiff may contest inventorship. The court found that only the director of the U.S. Patent and Trademark Office (PTO) has jurisdiction with respect to inventorship of pending patent applications. The 5th Circuit found that Congress explicitly vested the PTO with the sole discretion over granting patents and modifying inventorship of pending applications. Courts may only correct inventorship of issued patents.
The 5th Circuit found that, regardless of CamSoft’s inventorship assertion, removal of CamSoft’s complaint from state court was improper because district courts have no jurisdiction over such disputes until the disputed patent issues. The 5th Circuit found that the district court had no jurisdiction to remove this case, and affirmed the remand order.
Patents / Motion to Sever and Transfer
Convenience Trumps Potentially Higher Royalties *Web Only*
The U.S. Court of Appeals for the Federal Circuit vacated a denial of a motion to sever and transfer, directing the district court to grant petitioner’s motion because the transferee forum was more convenient than the transferor forum. In re Nintendo of America, Inc., Case No. 2014-132 (Fed. Cir., June 25, 2014) (Newman, J.).
Non-practicing entity Secure Axcess sued Nintendo and 11 retailers for patent infringement in the U.S. District Court for the Eastern District of Texas. Nintendo moved to sever the claims against it and transfer those claim to the U.S. District Court for the District of Washington where it is based and where most of the relevant documents and witnesses are located. Each of the 11 retailers stipulated that they would be bound by any judgment rendered by the transferee court. The Texas court denied the motion to sever, noting that the plaintiff could obtain a higher royalty against the retailers in light of higher retail prices and the retailers’ practice of bundling the accused systems with video games and other accessories. Having decided against severance, the district court held that the request for transfer must be denied.
The Federal Circuit vacated the district court decision, finding that the true defendant was the manufacturer and not the retailers, and thus the case should be severed to facilitate just, convenient, efficient and less-expensive determination. The issues of validity and infringement were common to the Nintendo and the retailers, and if the plaintiff were to collect royalties from Nintendo, it would be preclude a suit against the retailers.
In addition to the royalty concerns, the plaintiff argued that its choice of venue should be given deference because its principal place of business is in Plano, Texas. However, as a non-practicing entity, the plaintiff only leases 200 square feet of office space in Plano, and its executives work across the country. The Federal Circuit held that the district court must look beyond the connection of the parties with the transferor venue when the disparity of convenience is so marked as to outweigh the plaintiff’s right to choose the forum.
Patents / International Trade Commission Investigations
ITC Issues Its First Stay of a CDO
For the first time the U.S. International Trade Commission (U.S. ITC) issued a stay of a cease and desist order (CDO) issued at the conclusion of an investigation under § 337 of the Tariff Act. In the matter of Certain Digital Models, Digital Data, and Treatment Plans for Use in Making Incremental Dental Positioning Adjustment Appliances, the Appliances Made Therefrom, and Methods of Making Same, Investigation No. 337-TA-833.
The investigation was instituted on April 5, 2012 based on a complaint by Align Technology. The complaint alleged that respondents’ digital models, digital data and treatment plans for use in making incremental dental appliances infringed seven patents. The administrative law judge (ALJ) Rogers found a violation of § 337 with respect to six of the patents and recommended a CDO. Over a rare dissent (by Commissioner Johanson) the Commission affirmed-in-part, modified-in-part and reversed-in-part, issued CDOs and terminated the investigation. In his dissent, Commissioner Johanson argued that data sets cannot be considered “articles” within the meaning of § 337.
Pursuant to § 10(d) of the Administrative Procedure Act, the respondents filed a motion to stay the CDO pending appeal. The respondents argued that whether electronic transmissions are “articles” within the meaning of § 337 was a “difficult question,” that the CDOs would cause irreparable harm in the form of layoffs, disruption of operations and impaired relationships with vendors, as well as that the public interest supported a stay because doctors would not have an adequate substitute for the banned products. Align opposed the motion and argued that the Commission’s decision concerning “articles” was entitled to deference and that no “difficult” question was presented.
The standard for a motion to stay under the APA is the same four part test as is used for adjudicating motions for preliminary injunction: likelihood of success on the merits; irreparable harm absent a stay; harm to other parties interested in the proceeding; and public interest. The Commission has explained that each element of the test does not have to be given equal weight and that the likelihood of success element is generally futile in this context. Accordingly, a stay of a Commission remedy may be appropriate when the Commission has ruled on “an admittedly difficult question and when the equities of the case suggest that the status quo should be maintained.”
The Commission agreed with the respondents’ that the question of the meaning of the term “articles” § 337 was difficult one and that the extensive legal analysis already undertaken demonstrated the difficulty of the issue. The Commission agreed with Align “that the difficulty of the question presented counsels in favor of judicial deference to an agency’s interpretation of its organic statute,” however “the existence of that deference does not, in and of itself, obviate the fact that the question ruled upon by the Commission was a difficult one.” The Commission went on to find the respondents’ irreparable-harm arguments persuasive, in particular the fact that absent a stay Respondents would be forced to discontinue operations completely or drastically reduce its workforce.
The Commission stayed the CDOs, but noted that the decision “should not be viewed as a sharp departure from prior determinations denying stays” and that experience demonstrates that most investigations do not justify a stay of the remedies.
Practice Note: While the Commission stayed this CDO, such orders are unlikely to become a common practice at the ITC. An order staying a remedy remains extremely exceptional, but this decision provides a data point for a respondent confronted with a commission Decision that is truly one of first impression.
New IP Enforcement Policy in the EU
Wilko van Weert
Given that strategic importance of IP-sensitive industries for the EU economy, the European Commission (Commission) has introduced a new initiative with a view to strengthen the protection of EU-based IP rights by working towards a better enforcement strategy. Enhanced IP protection in the EU should allow it to compete more effectively on a global scale.
To this end, the Commission has published two communications: an EU Action Plan for the enforcement of Intellectual Property Rights (Action Plan) and a strategy for the protection and enforcement of intellectual property rights in third countries (Enforcement Strategy).
The Action Plan
The Action Plan has two main objectives: to impede the entry and diffusion of IP-infringing products and to stimulate investment, growth and employment in IP-reliant industries. As such, it constitutes the Commission’s response to the economic harm that results from commercial scale IP infringements.
The document contains a set of non-legislative steps that the Commission is intending to take in 2014 and 2015. Most notably, as a new enforcement policy tool, the Commission is intending to introduce the so-called “follow the money” approach, which aims to deprive commercial scale infringers of their revenue streams. This approach is perceived as being more effective than simply penalizing individuals for infringing IP rights, which is often done unknowingly. To this end, the Commission will seek to facilitate the development of international cooperation programs aimed at attacking the profits of commercial scale IP infringements specifically in the online environment.
Moreover, the Commission has acknowledged that it cannot attain its goals without first increasing the level of awareness as regards the economic harm caused by commercial-scale IP infringements. The European Observatory on Infringements of Intellectual Property Rights will be the organization charged with deploying targeted awareness campaigns.
The Commission will also be seeking industry views regarding the development of an EU due diligence scheme that would be used to prevent commercial-scale IP infringements or the impact of chargeback and related schemes (which could be used by consumers to decline payment on their payment cards for products that turn out not to be genuine).
Finally, the Commission will monitor the results of its own enforcement initiative with the publication of regular reports and studies on the economic effects of the measures taken.
In 2004, the Commission developed an IP enforcement strategy which defined a broad framework for combating IP infringements in third countries. Since then, not only has there been significant technological change but also the nature and scope of the challenges to IP rights held by European companies have evolved to a considerable extent. These developments called for a re-orientation of the EU strategy aimed at promoting IP rights and fighting IP infringements abroad.
As such, the new Enforcement Strategy proposes a number of steps as regards the protection of IP outside of the EU. For example, the Commission will consistently pursue the inclusion of IPR provisions in its bilateral trade agreements. Furthermore, the Commission will work with the EU’s trading partners to address systemic IP issues and key weaknesses in their IPR systems.
The Commission intends to assist IP rights holders in third countries by creating IPR Helpdesks, or by increasing the availability of IP expertise in EU delegations.
This new IP policy reflects the fact that, whereas IP holders are generally responsible for taking adequate steps to protect and enforce their IP rights, public authorities have their own role to play by providing an adequate framework for protecting rights and hence support for innovation and growth.
The Action Plan and the Enforcement Strategy are complementary documents that—together with the EU Customs Action Plan to combat IPR infringements—establish and reflect the EU’s three-pronged policy towards IP enforcement and protection:
- The Action Plan deals with the ways of combating economic harm that results from commercial-scale IP infringements;
- The Enforcement Strategy sets out the lines of action to enhance IPR standards and to limit trade in IPR infringing goods in third countries;
- The EU Customs Action Plan focuses specifically on border enforcement and on developing deeper cooperation between customs authorities in the EU and in third countries.
The overall aim of the current EU policy toward IP rights is to stimulate growth and employment and to reduce the incentives for the many commercial-scale IP-infringers that undermine the EU economy.
This new policy, calling for greater protection and enforcement of IP rights, comes at a time of increased activity by the EU Commission’s DG Competition in combating antitrust infringements that involve some form of misuse of IP. For example, the Commission has recently issued decisions in relation to the seeking of injunctions for FRAND-encumbered patents, as well as decisions against pharmaceutical companies concluding reverse payment patent settlement agreements (so-called “pay-for-delay” agreements). The Commission overall message seems clear: not only is the authority ready to put IP-related issues at the top of its policy agenda, it is also willing to take enforcement action by sanctioning the illegal use of IP rights.
Inter Partes Review
Indemnity Agreement Does Not Equate to a “Real Party in Interest” to Create Time-Bar for Inter Partes Review *Web Only*
The Patent Trial and Appeal Board (PTAB, the Board) has concluded that an inter partes review of a patent is not time-barred if a petition was filed more than one year after the date on which an indemnity of the petition was served with a complaint alleging infringement of the patent. Apple v. Achates Reference Publishing, Case IPR2013-00080 (PTAB, June 2, 2014) (Arbes, J.).
Achates Reference Publishing owned a patent which generally covered techniques for distributing one or more information products together, while reserving to the publisher the ability to control which products are actually installed on a user’s computer. Achates accused Apple and several other defendants of infringing the patent. Apple petitioned for inter partes review of the patent on the basis that the patent was invalid as anticipated or obvious based on several references. Achates argued that Apple’s petition was time-barred under § 315(b), which provides that an inter partes review may not be instituted based on a petition “filed more than one year after the date on which the petitioner, real party in interest, or privy of the petitioner is served with a complaint alleging infringement of the patent.” Specifically, Achates contended that QuickOffice, one of Apple’s co-defendants in the related litigation, was served with a complaint alleging infringement of the patent more than one year before the filing date of Apple’s inter partes review petition.
Achates argued that QuickOffice had a pre-existing substantive legal relationship with Apple and, therefore, was in privity with Apple. Specifically, Achates argued that QuickOffice agreed to Apple’s software development kit for developing iPhone applications, which required the developer (QuickOffice) to indemnify Apple for third party patent infringement claims. Thus, according to Achates, QuickOffice could not settle the litigation without Apple’s consent and was in privity with Apple.
The PTAB disagreed, noting that privity, in patent law and in other areas of law, exists between parties whose relationship is sufficiently close such that both should be bound by the trial outcome and related estoppels. The Board explained that common relationships where there is privity include preceding and succeeding owners of property, bailee and bailor, and assignee and assignor. In these relationships, privity exists as much from the needs of property law as from the values of preclusion by judgment. The relationship between Apple and its developers, such as QuickOffice, is different from these common privity relationships because Apple’s relationship does not involve a successive interest in the same property or any control by Apple over the actions of its developers that do not implicate Apple’s rights.
The Board also observed that, in the related litigation, Achates accused Apple of infringing the patent due to its own actions, as well as those of QuickOffice, and Achates accused QuickOffice of infringing the patent due to its activities in the Apple App Store, as well as other systems (e.g., the Amazon App Store for Android). Thus, there is a distinct basis for liability against Apple and against QuickOffice. In the view of the Board, these allegations further distinguished the relationship between Apple and QuickOffice from the common privity relationships.
Inter Partes Review / Post-Grant Review / IPR Practice
Dissent at the PTAB Leads to … Unpatentability
In its final written decision, the Patent Trial and Appeal Board (PTAB) found that 13 claims of the patent-at-issue were anticipated or obvious and rejected the patent owner’s contention of commercial success. Smith & Nephew, Inc. v. ConvaTec Technologies, Inc., Case IPR2013-00102 (PTAB, May 29, 2014) (Guest, APJ) (Snedden, APJ, concurring-in-part).
Smith & Nephew petitioned the PTAB for review of a patent directed to methods for enhancing the photostability of silver in antimicrobial materials for use in wound dressing and medical devices. Materials that contain silver are, in general, light-sensitive and can become discolored upon exposure. The patent-at-issue purported to address this issue.
In a first at the PTAB, an administrative law judge, while concurring in the final judgment, dissented from the majority’s construction of a vital patent term. In construing the term “substantially photostable,” the majority rejected the argument made by the patent owner and found no “reason to conclude that one of ordinary skill in the art would not consider purple as a desired color.” In forming its construction, the Board discounted testimony of the patent owner’s expert, noting that the expert had limited her construction to the “desired color” of a particular product with which she was familiar and not to wound dressings and medical devices in general.
APJ Snedden, dissented, explaining that the majority’s construction of “desired color” was insufficiently technical and would include purely “aesthetic purposes.” Judge Snedden instead argued that “desired color” should be interpreted as a measure of photostability. Nevertheless, Judge Snedden found the patents-at-issue to be unpatentable.
In terms of the patent owners arguments regarding secondary considerations—commercial success in particular the patent owner argued that its products had been commercially successful, and claimed that a nexus existed between the claimed features of the patent and its commercial success. The Board disagreed that a nexus existed, noting that the patent owner had “provided no supporting evidence that the features recited in the claims . . . are responsible for the success.” Most notably, despite claiming that the features of the claims were responsible for the success of their products, the patent owner failed to provide details of the manufacturing process, and their secondary considerations witness testified that they had no technical knowledge of the patent, and so “could not confirm whether specific products” in the line were even covered by the patent’s claims!
Inter Partes Review / Post-Grant Review / IPR Practice
The PTAB Is Unimpressed by Unsupported Attorney Argument
In a final written decision, the Patent Trial and Appeal Board (PTAB) found several claims of the patent at issue unpatentable as anticipated and obvious. The PTAB denied the patent owner’s motion to amend claims based on the patent owner’s failure to support its arguments with testimonial evidence. BAE Systems Info. and Electronic Sys. Integration, Inc. v. Cheetah Omni, LLC, Case IPR2013-00175 (PTAB, June 19, 2014) (Elluru, APJ).
BAE petitioned the PTAB for review of a patent directed to systems and methods for generating infrared (IR) light for use in medical procedures. Certain embodiments of the patent utilized “a Raman wavelength shifter that is coupled to a pump laser to produce a longer wavelength.”
During claim construction, the only term disputed by the parties was “gain fiber.” The patent owner argued that the construction at institution was too narrow and that a patentee is entitled to act as its own lexicographer. As such, the patent owner argued for a claim construction “broad enough to include the teachings in the specification and the understanding of a person of ordinary skill in the art as attested by [petitioner] BAE.”
In response, the petitioner argued that the patentee’s proposed construction would render the term “gain” superfluous because the construction “does not require amplification of the input signal.” The Board agreed with the petitioner that the patent owner’s construction would read out the term “gain,” though it did slightly alter its construction.
The Board agreed with the petitioner that the claims were unpatentable, noting that the patent owner had relied exclusively on attorney argument to rebut the petitioner’s anticipation and obviousness evidence. By contrast, the petitioner presented substantial expert testimony to support its arguments and was thus able to persuade the Board of its position by a preponderance of the evidence.
The Board next turned to the patent owner’s motion to amend claims found unpatentable. The Board denied the patent owner’s motion, finding that (the patent owner had provided support in the specification only for its added limitations and did “not identify support in the original disclosure ‘for each claim’ in its motion to amend . . . as required by Rule 42.121(b)(1);” and had not shown that its proposed substitute claims were patentable. The Board explained that a patent owner cannot make its case in an expert declaration and then simply refer in the motion, to the presentation in the declaration. That is, “[i]t is improper for any argument to be fully developed and presented, not in the party’s paper itself, but in the declaration of an expert.”
Practice Note: Attorney argument and expert declarations are not sufficient to prevail at the PTAB. Success at the PTAB depends on testimonial evidence and support found in original disclosures.
Inter Partes Review / Commercial Success
Objective Evidence Based on Unclaimed Species Insufficient Nexus
In the final written decision of an inter partes review, the Patent Trial and Appeal Board (PTAB) found all claims at issue unpatentable, concluding that the prior art provided strong evidence of obviousness, which was not overcome by the objective evidence presented due to lack of sufficient nexus to the claimed subject matter. The PTAB found that the objective evidence presented was either tied to a prior art element in the claim or pertained to an unclaimed embodiment/species, with no indication that other embodiments encompassed by the claims would perform similarly. Gnosis SpA v. South Alabama Medical Science Foundation, IPR No. IPR2013-00016 (PTAB, June 20, 2014) (Kamholz, APJ).
The patent claims at issue relate to dietary folate supplementation and are directed to a method of increasing intake of folate by administering a composition comprising substantially chirally pure 5-methyl-(6S)-tetrahydrofolic acid (5-methyl-(6S)-THF) and a nutritional substance comprising a vitamin other than ascorbic acid. The PTAB agreed with Gnosis that the challenged claims would have been obvious over the asserted prior art references, Serfontein and Marazza. According to the PTAB, Serfontein calls for a “suitable active metabolite of folate” in oral preparations to correct folate deficiency, Marazza specifically identifies chirally-pure 5-methyl-(6S)-THF as an active metabolite of folate suitable for oral use to increase folate levels, and the similar purpose and disclosure of the references provides sufficient rationale for combining them. The patentee’s arguments against the combination of Serfontein and Marazza, and against the use of reduced folates, were found unpersuasive for lack of credible evidence, among other reasons.
The patent owner also relied on various types of objective evidence based on five marketed products, each including substantially chirally-pure 5-methyl-(6S)-THF in combination with various other active ingredients, which are not specifically recited in the claims. The patentee emphasized that the combinations of active ingredients and the “unique” aspects of the products’ formulations account for their success. The PTAB disagreed with the patentee’s position that that nexus is sufficiently established when the product or method on which the evidence is based is covered by the patent. The Board cited In re Kao to not only require a showing that novel elements in the claim account for the objective evidence, but also that the objective evidence be reasonably commensurate in scope with the claim. The latter may be established by providing adequate basis to support the conclusion that other embodiments falling within the claim will behave in the same manner.
Here, the PTAB determined that the causal relationship between the claimed subject matter and commercial success, licensing, copying or long-felt need was tenuous, because the evidence was based on the unique formulations of the marketed products and therefore tied to combinations of elements not found in the claims at issue. According to the PTAB, by arguing the special advantages of the unique formulations, the patentee had implicitly suggested that other formulations within the scope of the claims would not necessarily offer the same benefits. PTAB also concluded that the evidence of unrecognized problem, unexpected results, skepticism and praise lacked nexus to the claims because they were tied to 5-methyl-(6S)-THF, a claim element known from the prior art and, hence, ineligible to establish the required nexus.
Inter Partes Review Still Difficult for Patent Owners *Web Only*
In a final written decision, the Patent Trial and Appeal Board (PTAB, the Board) found several claims subject to the requestor’s petition to be unpatentable over the prior art and denied the patent owner’s motion to amend the claims. EcoWater Systems LLC v. Culligan International Co., Case No. IPR2013-00155 (PTAB, June 24, 2014) (Droesch, APJ).
EcoWater challenged Culligan’s smart water softener patent, which claimed a water softener that could check water chemistry levels, transmit the chemistry information to a service provider if service was needed, download updated software and provide two-way communication between the softener and a remote controller.
he Board construed two terms which were critical to patentability: “said first location is different from said second location” and “automatically.” Neither party provided a construction for either term. However, in arguing around prior art, the patent owner argued that the second location cannot be “at or near” the first location. The Board disagreed with patent owner, particularly given an embodiment in the specification that described the first location and the second location being in the same house. Accordingly, the Board found that the “location” term should be construed as “the first site dissimilar from the second site.”
Similarly, the patent owner implied a construction for “automatically” when arguing that the prior art did not disclose automatically transmitting information because the prior art had intermediate or extra steps. Again, the Board disagreed with the patent owner, noting that the specification described intermediate steps in the transmission from the water softener to the service provider. Accordingly, the Board construed “automatically” as “independent of external influence or control.”
In drafting its constructions, the Board first noted that the specification did not provide a reasonably clear, deliberate and precise definition for either term. Accordingly, the Board relied on dictionary definitions to determine the plain and ordinary meaning. The Board then confirmed that the dictionary definitions did not conflict with the specification.
Institution Claim Construction
The patent owner conceded that while most of the claim elements were disclosed in the prior art, the art did not show a situation where the first location was different from the second location, or was automatically transmitting information to the service provider. However, the Board found that, based on its claim constructions, the prior art did disclose these limitations and thus rebuffed the patent owner’s arguments as based on flawed (implied) constructions.
Motion to Amend
The Board noted that the burden is on the patent owner to demonstrate patentability of the proposed substitute claims, including written description support.
In the proposed substitute claims, the patent owner attempted to add the modifier “automatically” to “download updated software,” and for support, pointed to a paragraph in the specification that unfortunately (for the patent owner) did not include the word “automatically.” The patent owner did not explain why “automatically downloading” was omitted from the specification, or why the specific step of automatic downloading is supported by automatic communication (which was disclosed in the specification). Similarly, the patent owner did not provide any written description support for adding the modifier “directly” to the phrase “transmitting to a service provider,” nor did the patent owner provide an explanation how the original specification reasonably conveys to a person of ordinary skill in the art that the inventor had possession of the claimed subject matter. Accordingly, the PTAB concluded that the patent owner did not meet its burden to show written description support for proposed substitute independent claim. In addition, for another proposed substitute dependent claim, while the patent owner did cite support in the specification for the limitations of that claim, its failure to provide support for the underlying base claim doomed the proposed substitute claim.
The patent owner also failed to assert that automatically downloading updated software, as taught by the prior art of record, would have been beyond the knowledge, skill and ordinary creativity of one with ordinary skill in the art.
Trademarks / Likelihood of Confusion
Cert Alert: Is TTAB Decision on Likelihood of Confusion Preclusive? *Web Only*
The U.S. Supreme Court has agreed to review a decision of the U.S. Court of Appeals for the Eighth Circuit (in turn affirming a district court decision) finding the mark “Sealtight” (as used in connection with aircraft assembly components) to be merely descriptive, notwithstanding that in the Trademark Trial and Appeal Bound (TTAB) had rejected an attempt (by Hargis Industries) to cancel the registration for that mark (owned by B&B Hardware). The TTAB found the registration to be incontestable.
In its decision, the TTAB had addressed the issue of likelihood of confusion, but the 8th Circuit concluded that likelihood of confusion in the context of a registration does not equate to a likelihood of confusion in the context of an infringement action.
The questions presented are:
- Whether the TTAB’s finding of a likelihood of confusion precludes Hargis from re-litigation that issue in infringement litigation, in which likelihood of confusion is an element.
- Whether, if issue preclusion does not apply, the district court was obligated to defer to the TTAB’s finding of likelihood of confusion absent strong evidence to rebut it.
B&B Hardware, Inc. v. Hargis Industries, Inc., Case No. 13-352 (Supr. Ct., July 1, 2014).
Cert Alert: Is Trademark Tacking a Fact Issue or Legal Issue? *Web Only*
In trademark law “tacking” is a practice whereby an applicant for registration can establish an earlier priority date by adding the period of use of an older mark to the period of use of a newer mark. The U.S. Court of Appeals for the Ninth Circuit concluded that the practice is appropriate only where the two marks are so similar that consumers would generally regard them as the same mark. In the present case the 9th Circuit noted that tacking is usually a fact intensive issue left to the jury unless the evidence is so strong that only one legal conclusion is possible. The U.S. Supreme Court has now granted certiorari to determine whether trademark tacking is an issue of law or an issue of fact (for the jury). Hana Financial, Inc. v. Hana Bank & Hana Financial Group, Case No. 13-1211 (Supr. Ct., June 23, 2014).
The question presented in the petition for certiorari is the following:
To own a trademark, one must be the first to use it; the first to use a mark has “priority.” The trademark “tacking” doctrine permits a party to “tack” the use of an older mark onto a new mark for purposes of determining priority, allowing one to make slight modifications to a mark over time without losing priority. Trademark tacking is available where the two marks are “legal equivalents.”
The question presented, which has divided the courts of appeals and determined the outcome in this case, is:
Whether the jury or the court determines whether use of an older mark may be tacked to a newer one?
Trademarks / Bankruptcy / License
The Eighth Circuit Weighs In on Trademark Licenses as Executory Contracts in Bankruptcy Proceedings
An en banc panel of the U.S. Court of Appeals for the Eighth Circuit reversed an earlier ruling of the same court finding that a trademark license agreement that was entered into as part of an asset purchase agreement was not executory because both parties to the agreement had substantially performed their obligations thereunder; therefore, the agreement could not be rejected under § 365(a) of the Bankruptcy Code. Lewis Bros. Bakeries, Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), Case No. 11-1850 (8th Cir., June 6, 2014) (Colloton, J.) (Bye, J., concurring-in-part and dissenting-in-part).
In 1996, the Justice Department challenged Interstate Bakeries Corporation’s (Interstate Bakeries) acquisition of the Continental Baking Company under antitrust laws, which resulted in a judgment requiring Interstate Bakeries to divest at least one of its brands in four different geographic territories. Accordingly, Interstate Brands Corporation (IBC), a subsidiary of Interstate Bakeries, and Lewis Brothers Bakeries (LBB) entered into an asset purchase agreement and a license agreement selling two of Interstate Bakeries’ bread operations and assets, including an exclusive trademark license for 13 different trademarks.
In 2004, Interstate Bakeries and several subsidiaries, including IBC, filed bankruptcy petitions under Chapter 11 and the license agreement with LBB was identified as an executory contract that Interstate Bakeries intended to assume as part of its plan of reorganization. In 2008, LBB filed a complaint seeking a declaratory judgment that the license agreement was not an executory contract under 11 U.S.C. § 365 and therefore not subject to assumption or rejection by the debtor. The bankruptcy court reviewed only the license agreement and found that both IBC and LBB had “material, outstanding obligations” and thus held that the license agreement was executory. LBB appealed and the district court affirmed the bankruptcy court. LBB then appealed to the 8th Circuit, where a divided panel affirmed the district court.
LBB filed a petition for rehearing en banc, and the full court received amici curiae from the Department of Justice and the Federal Trade Commission arguing that treating the license agreement as an executory contract and allowing Interstate Bakeries to reject the license agreement in bankruptcy would harm the purpose of the original antitrust decree. LBB’s petition was granted.
The 8th Circuit En Banc
To determine whether the license agreement is executory, the court explained that it must first identify what constitutes the agreement at issue and then establish whether the “agreement” as it is defined is an executory contract under the bankruptcy code. On the first question, the court disagreed with the lower courts which reviewed only the license agreement as a standalone document. Instead, the court held that, under the applicable Illinois state law, the appropriate analysis should consider both the license agreement and the asset purchase agreement to be an integrated agreement between the parties. The court stated that absent evidence showing a contrary intention of the parties, “where two or more instruments are executed by the same contracting parties in the course of the same transaction, the instruments will be considered together.”
Once the court determined that the asset purchase agreement and the license agreement should be considered together as one contract, it turned to the question of whether the integrated agreement was an executory contract, namely, a “contract under which the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” The court then found that the essence of the integrated agreement was the sale of IBC’s two bread operations and not merely the licensing of IBC’s trademarks. Therefore, in that context, the court concluded that the agreement at issue was not executory because IBC substantially performed its obligations under the asset purchase agreement and the license agreement and that the failure to perform any remaining obligations would not be a material breach. Citing analogous facts in the U.S. Court of Appeals for the Third Circuit’s decision in In re Exide, the court found that the parties’ remaining obligations under the agreement did not “outweigh the substantial performance rendered and benefits received…” and held that the contract was not executory and reversed and remanded.
Judge Bye, joined by Judges Smith and Kelly, filed a dissent arguing that both parties had ongoing, material obligations under the license agreement (even when considered as part of an integrated agreement), and specifically cited LBB’s obligation to maintain quality control of trademarked goods and IBC’s obligation to refrain from use of the trademarks in the territory.
Trademarks / Trade Dress Infringement
Pattern of Functional Dots in Absorbent Pad Functional? It’s a Fact Issue
Addressing whether a pattern of dots embossed on an absorbent pad was functional, the U.S. Court of Appeals for the Fourth Circuit reversed a lower court’s summary judgment in favor of the accused infringer and remanded the case, finding sufficient evidence to raise a genuine issue of material fact regarding the functionality of the pad’s pixel pattern. McAirlaids, Inc. v. Kimberly-Clark Corp., Case No. 13-2044 (4th Cir., June 25, 2014) (Duncan J.).
McAirlaids produces “airlaids,” a textile-like material that is used in absorbent goods including absorbent pads. The material is formed using a pressure-fusion process by which cellulose fibers are shredded and arranged into loosely formed sheets. The sheets are embossed at specific areas, the dots, to form the pads without glue or binders. Instead, the cellulose fibers are fused at the dots to hold the material together. The size and spacing of the dots within the pattern must fall within certain parameters for the material to hold together and also be absorbent. The pressure-fusion process of forming the material was patented by McAirlaids.
McAirlaids uses a pixel pattern of embossed dots for use in its absorbent products. McAirlaids registered this pattern as trade dress with the U.S. Patent and Trademark Office (PTO). McAirlaids sued Kimberly-Clark for trade dress infringement and unfair competition, as well as state law claims for using a similar dot pattern on its GoodNites bed mats. The GoodNites bed mats are manufactured by a different process than McAirlaids’ patented pressure-fusion process. Kimberly-Clark filed a counterclaim alleging the pixel pattern was functional and therefore unavailable for protection under trade dress laws. The district court found McAirlaids’ pixel dot design functional and therefore not protectable as trade dress, granting summary judgment for Kimberly-Clark. McAirlaids appealed.
In overturning the district court’s decision, the 4th Circuit distinguished the Supreme Court’s decision in TrafFix Devices v. Marketing Displays (IP Update, Vol. 15, No. 5) and concluded that, although the pressure-formed dots of the pixel design are themselves functional, McAirlaids had presented sufficient evidence to show a genuine dispute as to whether the embossed pattern as a whole is functional. The court distinguished TrafFix on two points. First, although McAirlaids obtained utility patents relating to the absorbent pads, the patents covered the process and material, but did not mention a particular embossing pattern. The existence of a utility patent does not automatically render all features relating to the patent functional. Second, McAirlaids’ pixel pattern was properly registered as trade dress with the PTO. The registered trade dress provides a presumption of validity, which has a burden-shifting effect requiring the party challenging the registered mark to show the trade dress is invalid by a preponderance of the evidence. While the district court had found McAirlaids’ evidence of non-functionality insufficient to show a genuine dispute, the 4th Circuit made clear that where the design is the subject of a trade dress registration, the burden of proof to show functionality falls on the trade dress challenger. Although the dots of the pixel design are functional in holding the material together, the pattern of the dots is not inherently functional.
Trademarks / Infringement
Federal Circuit Smokes Cuban Entity on Standing Issue *Web Only*
The U. S. Court of Appeals for the Federal Circuit reversed the Trademark Trial and Appeal Board’s (the Board) decision, holding that a Cuban cigar manufacturer’s standing to pursue cancellation of two federal registrations was not barred in light of a prior decision of the U.S. Court of Appeals for the Second Circuit, which held that the Cuban Assets Control Regulations (CACR) precluded the Cuban company from owning the marks at issue. Empresa Cubana Del Tabaco (d/b/a Cubatabaco) v. General Cigar Co., Inc., Case No. 13-1465 (Fed. Cir., June 4, 2014) (Rader, J.).
The plaintiff, Cubatabaco, is a Cuban entity that owns the COHIBA mark in Cuba for use in connection with cigars. The defendant, General Cigar, owns two trademark registrations for the mark COHIBA for use in connection with cigars.
In 1997, Cubatabaco filed an application to register the COHIBA mark in the United States for cigars and related goods, based on its registration of the same mark in Cuba. Cubatabaco relied on Section 44(e) of the Lanham Act, which allows a foreign applicant to rely on a foreign registration to register the same mark in the United States if the applicant has a bona fide intent to use the mark in commerce. The U.S. Patent and Trademark Office (PTO) rejected Cubatabaco’s trademark application based on General Cigar’s registrations, so Cubatabaco filed a petition to cancel General Cigar’s trademark registrations for COHIBA.
Under the CACR, a Cuban entity is prohibited from a wide range of transactions in the United States. However, the CACR contains certain exceptions for Cuban entities to engage in certain otherwise prohibited transactions pursuant to a general or a specific license. Cubatabaco obtained a special license and sued General Cigar over its use of the COHIBA mark.
The district court cancelled the two trademark registrations owned by General Cigar but the 2d Circuit reversed the decision, stating that the court could not grant Cubatabaco injunctive relief because that remedy would entail a prohibited transfer of property under the CACR, since Cubatabaco would acquire ownership of the mark.
When the PTO cancellation proceeding resumed, the Board held that Cubatabaco lacked standing to challenge the trademark registrations of the same mark because Cubatabaco was deemed to have no property interest in the mark. Cubatabaco appealed.
On appeal, the Federal Circuit found that neither the 2d Circuit decision nor the CACR prohibits Cubatabaco from registering the mark. The Court also held that CACR authorizes Cubatabaco to seek cancellation of registrations that block its application: “Because the USPTO refused Cubatabaco’s registration based on likelihood of confusion with General Cigar’s Registrations, Cubatabaco has a real interest in cancelling the Registrations and a reasonable belief that the Registrations blocking its application are causing it damage. Cubatabaco therefore has a cause of action under the Lanham Act to seek cancellation of the Registrations.”
Finally, the Federal Circuit found that neither issue preclusion nor claim preclusion barred any of the grounds on which Cubatabaco sought cancellation. Claim preclusion did not apply because the 2d Circuit did not render a final judgment on the merits of the cancellation claims. Issue preclusion did not apply because of various reasons depending on the specific grounds, e.g., the 2d Circuit did not address a particular ground or determination of the issue was not necessary to the judgment.
Copyrights / Public Performance
The Aereo Crashed: Cheap Internet TV Thwarted
The Supreme Court of the United States has now determined that internet streaming services directly infringe the copyrights of several television networks. American Broadcasting Cos., Inc. v. Aereo, Inc., Case No. 13-461 (Supr. Ct., Jun 25, 2014) (Breyer, Justice) (Scalia, Justice, dissenting).
At the heart of Aereo’s system is an antenna. Aereo employs thousands of dime-sized antennas stored in warehouses located in the geographic markets the company services. Aereo assigns a particular antenna to each of its subscribers. The subscribers select the network television shows they want to watch by clicking the “watch” button on Aereo’s website. The subscriber’s assigned antenna then begins to capture the desired television show from the local airwaves and stores the broadcast signal to a data file exclusively assigned to the subscriber on a company server. In other words, Aereo’s system creates a subscriber-specific copy—a “personal” copy—of the subscriber’s desired television program. Aereo’s system then transforms the stored broadcast data into digital streaming video for viewing on internet devices. There is a short lag time between the original broadcast and the internet stream. A subscriber can also choose to store the broadcast and view it later. Aereo charges its customers eight dollars a month for its services.
Several network television broadcasters jointly filed a copyright infringement action against Aereo in federal district court, alleging that Aereo was infringing their right to perform their copyrighted audiovisual works publicly, in violation of the Transmit Clause (§ 106(4)) of the Copyright Act. The broadcasters sought a preliminary injunction, claiming that the very existence of broadcast television as we know it was at stake.
Aereo argued that it is no more than an antenna rental service—its subscribers choose the television shows they wish to watch and Aereo merely supplies a subscriber-specific antenna that captures the show from public airwaves and makes a personal copy of the show in a subscriber-specific file, and the show is then transmitted to the subscriber’s internet device in digital streaming format.
The district court denied the request for preliminary injunction and the U.S. Court of Appeals for the Second Circuit affirmed. (See IP Update, Vol. 16, No. 5.) The lower court reasoned that Aereo did not perform the network broadcaster’s copyrighted works publicly because it does not transmit the programs to the public. Instead, each time the Aereo system streams a program to a subscriber, it sends a private transmission that is available exclusively to that subscriber and not to other subscribers. The broadcasters sought, and the Supreme Court granted, certiorari to consider the issue (IP Update, Vol. 17, No. 1).
The Supreme Court’s Decision
A six-member majority reversed the 2d Circuit decision, concluding that Aereo infringes the network broadcasters’ copyrighted programs by publicly performing the programs. Writing for the majority, Justice Breyer first explained that Congress had amended the Copyright Act in 1976 specifically to overturn the Supreme Court’s previous decisions in Fortnightly Corp. v. United Artists Television and Teleprompter Corp. v. Columbia Broadcasting System. In those decisions, the Supreme Court held that CATV companies (early versions of today’s cable companies) did not violate the copyright laws by merely providing an enhanced antenna and retransmitting network television broadcasts to customers via coaxial cables.
Breyer explained that, based on the legislative history, Congress amended the language of several sections of the Copyright Act to ensure cable companies fell within the scope of the Transmit Clause. “In 1976 Congress amended the Copyright Act in large part to reject the Court’s holdings in Fortnightly and Teleprompter.” Justice Breyer noted the amended act clarifies that to “perform” an audiovisual work means “to show its images in any sequence or to make the sounds accompanying it audible.” He further pointed out that Congress also enacted the Transmit Clause, which states that an entity performs publicly when it “transmit[s] … a performance … to the public.” He went on to note that, “[c]able system activities, like those of the CATV systems in Fortnightly and Teleprompter, lie at the heart of activities that Congress intended the language to cover.”
The majority then concluded that Aereo’s activities are governed by the Copyright Act (and violate the network broadcasters’ copyrighted works) because Aereo’s services resemble the transmission services provided by cable companies. Justice Breyer explained:
This history makes clear that Aereo is not simply an equipment provider. Rather Aereo, and not just its subscribers, ‘perform[s]’ (or ‘transmit[s]’). Aereo’s activities are substantially similar to those of the CATV companies that Congress amended the Act to reach. … Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast. In providing this service, Aereo uses its own equipment, housed in a centralized warehouse, outside of its users’ homes.
The majority did note a distinction between Aereo’s transmission services and those of the CATV companies addressed in Fortnightly and Teleprompter. Although the latter transmitted constantly, sending the same continuous programming to each subscriber’s television sets, Aereo’s system remains dormant until a subscriber choses a program to watch. Only then, in an automatic response to the subscriber’s request, does Aereo’s system activate the subscriber-specific antenna and begin transmitting the chosen program. However, the Supreme Court rejected the notion that this distinction was meaningful:
Given Aereo’s overwhelming likeness to the cable companies targeted by the 1976 amendments, this sole technological difference between Aereo and traditional cable companies does not make a critical difference here. The subscribers of the Fortnightly and Teleprompter cable systems also selected what programs to display on their receiving sets. … [I]n Fortnightly, the television signals, in a sense, lurked behind the screen, ready to emerge when the subscriber turned the knob. Here the signals pursue their ordinary course of travel through the universe until today’s “turn the knob”—a click on a website—activates machinery that intercepts and reroutes them to Aereo’s subscribers over the Internet.
The majority concluded that because Aereo was “for all practical purposes a traditional cable system,” the sole technological difference on which Aereo sought to distinguish itself from cable companies was not persuasive, and Aereo’s services constitute “performance” of the network broadcaster’s copyrighted works.
In addressing Aereo’s argument that it did not perform the works publicly because its system transmits the subscriber-chosen program to the single, specific subscriber and not to other subscribers, the majority explained that was not relevant: “the subscribers to whom Aereo transmits programs constitute ‘the public.’ Aereo communicates the same contemporaneously perceptible images and sounds to a large number of people who are unrelated and unknown to each other.” In the view of the majority, this matters because the Copyright Act states that an entity performs a copyrighted work publicly when it performs at “any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered.” In other words this suggests that the public “consists of a large group of people outside of a family and friends.”
The Supreme Court sought to assuage the fears of other companies in the communications technology sector, such as those engaged in cloud storage and computing or selling DVRs, by characterizing its decision as a “limited holding” that should not impose blanket copyright liability on new technologies that Congress did not wish to reach: “We agree that Congress, while intending the Transmit Clause to apply broadly to cable companies and their equivalents, did not intend to discourage or to control the emergence or use of different kinds of technologies. But we do not believe that our limited holding today will have that effect.”
A three-member dissent, authored by Justice Scalia and joined by Justices Thomas and Alito, argued that the majority disregarded widely accepted rules for assessing service-provider liability and adopted an improvised “looks-like-cable-TV” standard that “will sow confusion for years to come.” The dissent first drew the distinction between direct and secondary liability for copyright infringement and argued that Aereo was not culpable for direct infringement because it did not perform the copyrighted works—the subscriber did by selecting the copyrighted subject matter to be transmitted. Justice Scalia illustrated his point by using internet service providers as an example:
When one user sends data to another, the provider’s equipment facilitates the transfer automatically. Does that mean that the provider is directly liable when the transmission happens to result in the “reproduc[tion],” § 106(1), of a copyrighted work? It does not. The provider’s system is “totally indifferent to the material’s content,” whereas courts require “some aspect to volition” directed at the copyrighted material before direct liability may be imposed. The defendant may be held directly liable only if the defendant itself “trespassed on the exclusive domain of the copyright owner.” Most of the time that issue will come down to who selects the copyrighted content: the defendant or its customers.
Justice Scalia concluded that “Aereo does not ‘perform’ for the sole and simple reason that it does not make the choice of content. And because Aereo does not perform, it cannot be held directly liable for infringing the Networks’ public-performance right.” The dissent recognized that, although not a direct infringer, Aereo may be liable for secondary infringement because it facilitates and induces subscribers to perform the network broadcasters’ works using its system. However, secondary liability was not before the Supreme Court.
In a section of the dissent entitled “Guilt by Resemblance,” Justice Scalia took aim at the majority’s “if-it-looks-like-a-duck” liability analysis, questioning the propriety of assessing Aereo’s direct liability for copyright infringement simply because its services appear to be a next-generation cable television service. Justice Scalia equated Aereo’s internet digital streaming services to “a copy shop that provides its patrons with a library card.” In other words, Aereo’s system merely provides the technological wherewithal to its subscribers to select, copy and view copyrighted content at the subscriber’s sole discretion—something a subscriber could purportedly do through legal means with a rabbit ear antenna, a television and a DVR.
The dissent also pointed out what it deemed key material differences between Aereo’s services and the services cable companies offer: cable companies select the content of the programs they transmit, while Aereo does not (the subscriber selects the show to be transmitted) and cable companies transmit the full range of broadcasted programs to all subscribers at all times, while Aereo’s system transmits a single selected program at a specific time to a single subscriber at the request of that subscriber. Finally, the dissent argued that the majority’s “cable-TV-lookalike rule” lacks analytical integrity, omits criteria for when it should or should not be applied and “greatly disrupts settled jurisprudence which, before today, applied the straightforward, bright-line test of volitional conduct directed at the copyrighted work.”
Practice Note: On June 28, 2014, Aereo announced that it was “temporarily” shutting down its streaming video service in order to determine if it can devise a new business model consistent with the Supreme Court decision.
Per Second Circuit: Full Text Searchable Database Is Fair Use
The U.S. Court of Appeals for the Second Circuit, affirming a district court summary judgment ruling in favor of a consortium of authors, ruled that the unauthorized digitization of copyrighted works, for the purpose of creating a full text searchable data base for print disabled users is fair use under the § 107 of the Copyright Act. Authors Guild, Inc., et al. v. HathiTrust, et al., Case No. 12-4547 (2d Cir., June 10, 2014) (B. D. Parker, J.).
The case, which drew a slew of interveners (representing handicapped groups) and amici, involved the creation of a full text searchable database in formats accessible to those with disabilities, such as blindness.
The defendant, HathiTrust, operates the HathiTrust Digital Library (HDL) and is the repository for digital copies of the collections from 80 member institutions, primarily universities and non-profits. Its collection includes over 10 million works, both copyrighted and not copyrighted. For copyrighted works, a search returns only a list of pages on which a search term is found and the frequency of its appearance on each listed page. The HDL also permits patrons having “certified print disabilities,” such as blindness, to access the full text of a copyrighted work, using “adaptive technologies” such voice conversion or print magnification.
The Authors Guild sued the HathiTrust and several member universities for copyright infringement, seeking declaratory judgment and injunctive relief. HathiTrust defended based on the fair use doctrine, codified at 18 U.S.C. § 107. The district court, finding the HDL uses to be “transformative,” found for the HathiTrust, extolling its “invaluable” contribution to the advancement of knowledge. The district court also found that making the database available to persons having “certified print disabilities” was fair use. The plaintiffs’ representing foreign copyright holders were dismissed from the case for lack of standing. The Authors Guild appealed.
The 2d Circuit, after examining cases from the Supreme Court, the 2d Circuit and its sister circuits in which fair use was found, found the doctrine was an important aspect of the constitutional underpinnings of the copyright laws, i.e., to promote the progress of science and the useful acts. However, the 2d Circuit also recognized the four factor codification of the fair use doctrine (§ 107) is intended to balance tensions between the authors interest and the putative fair use; i.e., by avoiding excessive damage to the market for the original work.
Full Text Search Is Fair Use
As for the first § 107 factor (the nature and character of the use) the 2d Circuit characterized the creation of the HDL data base as “a quintessentially transformative use” evidencing “little or no resemblance” to the original text. The court also noted that it is not the “purpose” of the authors to enable text searching hence the search function does not supersede the purpose of the original creation.
As for the second factor (the nature of the copyrighted work) the court conceded the works in issue “are of the type that the copyright laws value and seek to protect,” but found this factor to not be dispositive.
Turning to the third factor (whether the copying was excessive) the 2d Circuit noted there are no absolute rules as to how much of a work can be copied under the doctrine since “permissible copying varies with the purpose and character of the use.” Rather, the court looked to whether the copying was more than was necessary. Given the purpose of the HDL database, the court concluded that even where it is necessary to copy an entire work, this factor “does not weigh against a finding of fair use.”
Finally, turning to the fourth factor (the effect of the use on the potential market for the original work) the court concluded that the full text search data base posed “no harm” to the authors and that the authors had identified none.
Access to Print Disabled Persons Is Fair Use
Employing the same four-factor analysis, the 2d Circuit found that providing “print-disabled patrons with versions of all of the works contained in [HDL’s] digital archive in formats accessible to them” was fair use.
As for factor one (transformative use), although the 2d Circuit disagreed with the district court that print disabled copies were transformative, it nevertheless found this factor favored fair use (citing Sony Corp. of Am., Supr. Ct. 1984 and the legislative history of the Copyright Act).
As before, factor two (nature of the work) mitigated against fair use.
Again as with the full-text data base analysis, factor three (extent of copying) became a neutral factor as the adaptive technologies (digital page turning, magnification, voice or text conversion, color contrast enhancements, etc.) were found to “reasonable” accommodations “necessary [for patrons] to perceive the books fully.”
In terms of the fourth factor (commercial effect of copying) the court noted that the market for books accessible to the handicapped is miniscule compared to the 10 million titles in the HDL data base, and therefore the factor weighed in favor of fair use. The court noted the legislative history of the Copyright Act to the effect that publishers did not usually make books available in specialized formats for the blind and noted “[t]hat observation remains true today.”
Copyrights / Literary Characters
Judge Posner Solves Sherlock Holmes Copyright Case
The original character of the famous detective Sherlock Holmes, along with his sidekick, Dr. John H. Watson, are no longer subject to copyright protection. In an opinion by Judge Richard A. Posner, the U.S. Court of Appeals for the Seventh Circuit held that copyright protection in these century-old literary characters cannot be extended simply by changing their features in later stories. When the original story expires, the characters covered by the expired copyright are “fair game” for follow-on authors. Klinger v. Conan Doyle Estate, Ltd., Case No. 14-1128 (7th Cir., Jun. 16, 2014) (Posner, J.).
More than a century ago, Sir Arthur Conan Doyle created the fictional characters of Sherlock Holmes and Dr. Watson. From 1887 to 1927, Doyle authored more than 60 detective stories and novels featuring these characters. Under U.S. copyright law, works published before January 1, 1923 no longer have copyright protection. Thus, most of Doyle’s copyrights on the Sherlock Holmes stories have since expired. For the 10 Sherlock Holmes stories published after 1923, the U.S. copyrights on these works will expire 95 years after the date of their original publication. The copyrights in these works have since passed to Doyle’s estate.
In 2013, author Leslie Klinger compiled an anthology of original and new Sherlock Holmes stories, entitled In the Company of Sherlock Holmes. Doyle’s estate, however, demanded a license from Klinger’s publisher, Pegasus Books. The estate also suggested that if Klinger’s anthology was published without a license, the estate would prevent retailers, like Amazon, from selling the book. As a result, Pegasus Books refused to publish Klinger’s anthology.
Klinger then sued Doyle’s estate seeking declaratory judgment of non-infringement of Doyle’s copyrights. The district court granted Klinger summary judgment of non-infringement; Doyle’s estate appealed on two grounds. First, Doyle’s estate argued that the district court lacked subject-matter jurisdiction because there was no actual case or controversy between the parties. Second, Doyle’s estate argued that the characters of Holmes and Dr. Watson, among others, were still copyrighted because they were complex characters that evolved over the course of the Sherlock Holmes series of stories, including those stories still protected by U.S. copyright.
The 7th Circuit rejected both arguments. The court found that the threat to block distribution of the book by retailers and the implicit threat to sue for copyright infringement created an actual controversy. The court also affirmed the judgment of non-infringement because “[w]hen a story falls into the public domain, story elements, including characters covered by the expired copyright, become fair game for follow-on authors.”
While it is common to use the same character in successive works, the copyrights on the original Holmes and Watson characters from 1887 had expired. The existing copyrights in the 10 Sherlock Holmes stories only covered the features Doyle added to the original Holmes and Watson characters. In other words, “[t]he alterations do not revive the expired copyrights on the original characters.”
Ultimately, the court found that the Doyle estate was not seeking to protect the additional features developed in the later Sherlock Holmes stories, but rather any story about Holmes and Dr. Watson that was published without payment of a licensing fee. To find infringement under such circumstances would be to improperly extend Doyle’s copyright protection in the original Holmes and Watson characters by 135 years.
Practice Note: If seeking to enforce copyright protection on derivative works based on expired copyrights, it is important to parse the new, additional elements in the derivative works still protected by copyright from the expired elements.
Copyrights / Computer Software
Sixth Circuit Affirms the Importance of Identifying Protected Elements of Copyrighted Software *Web Only*
The U.S. Court of Appeals for the Sixth Circuit confirmed that a party claiming infringement of copyrighted computer software must identify those components of the software that are protectable under copyright law before a jury can determine the substantial similarity of the defendant’s software. Automated Solutions Corporation v. Paragon Data Systems, Inc., Case No. 12-3025; -3058 (6th Cir., June 25, 2014) (Cleland, J., sitting by designation).
In 2001, Automated Solutions and Paragon Data Systems entered into a software development and ownership agreement to jointly develop, own, market and license computer software for the Chicago Tribune and other newspaper companies called the “Single Copy Distribution System” (SCDS), which was used to track and manage newspaper deliveries and subscriptions.
In 2003, Paragon terminated its contract with Automated Solutions over billing disputes, and within one week, Automated Solutions filed an action seeking a declaratory judgment that it was the sole owner of the SCDS software. Because Paragon terminated the contract with Automated Solutions rather than pursuing remedies provided for under the agreement, the court found that Paragon waived any right to market the SCDS software on its own. The Ohio Court of Appeals affirmed the state court’s ruling, holding that Paragon did not have any right to copyrights in the modifications of the SCDS software after 2003. Accordingly, Automated Systems thereafter registered its copyright interest in the SCDS software with the United States Copyright Office.
In 2004, a Cleveland newspaper engaged Paragon to develop hardware and software for its newspaper delivery system, and within one month Paragon delivered a software program called DRACI. The Paragon employee that was assigned to work on the DRACI software indicated that he was the only person at Paragon to write any code used in DRACI, and that he composed the software code “from scratch.”
After Automated Systems acquired its federal copyright registration in the SCDS software code in 2005, Automated Systems filed another suit against Paragon in state court (which Paragon removed to federal court), and Automated Systems amended its complaint to allege copyright infringement and other claims that Paragon copied the SCDS software to use in its DRACI software.
Although Automated Systems presented arguments alleging that Paragon had directly copied the SCDS software, Automated Systems did not identify which portions of the SCDS software were subject to copyright protection under the Copyright Act. Therefore, the court found that Automated Systems “failed to provide any basis by which a jury could determine that Paragon infringed on anything.”
On appeal, the 6th Circuit affirmed the district court’s denial of Automated Systems’ motion for sanctions against Paragon with respect to certain issues of spoliation of evidence and affirmed the grant of summary judgment to Paragon dismissing all of Automated Systems’ claims, including the claim of copyright infringement. The court cited the lower court’s reliance on its decision in Olmstead (6th Cir., 2010), and found that Automated Systems did not submit sufficient evidence to show which portions of the SCDS software were original (and not functional) and therefore subject to copyright protection. Specifically, the court noted that Automated Systems’ reliance on the declaration of its computer science expert was not sufficient, because the expert stated only that he distilled the SCDS software to its “unique protectable expression,” but the expert did not elaborate as to which portions of data were unique, what made them unique or why certain portions of data were actually creative and protectable rather than functional or dictated by “practical realities of software” in general.
Therefore, the court found no error in the district court’s grant of summary judgment in favor of Paragon due to Automated Systems’ inability to identify the protectable elements of the SCDS software and affirmed.
Stop the Music (or Be Vicariously Liable) *Web Only*
The U.S. Court of Appeals for the Sixth Circuit found a restaurant owner personally liable where the restaurant played recorded and live music without authorization, and further found that the Copyright Act can impose vicarious liability. Reviewing the “handful of doctrines” developed over the years regarding liability for copyright infringement committed by others, the 6th Circuit concluded that a defendant may become vicariously liable for a direct infringement of a copyright when he profits from the infringement while declining to stop it. Broadcast Music, Inc., et al v. Meadowlake, Ltd., Case No. 13-3933 (6th Cir., June 6, 2014) (Sutton, J.).
In this case, the 6th Circuit applied a vicarious liability doctrine having two parts. First, it must be determined whether the defendant had “the right and ability to supervise the infringing conduct,” and second, it must be determined whether the defendant had “an obvious and direct financial interest in the infringement.” Here, the Sixth Circuit concluded that each part of the test was met.
Defendant Roy Barr and his son own Meadowlake, a limited liability company that runs a golf-course restaurant. Barr was the undisputed 95 percent owner and ultimate decision maker of the restaurant, which his son manages. The restaurant offers dancing and music—sometimes live performances and sometimes recordings but in either instance “without getting the copyright owners’ permission.” This eventually came to the attention of Plaintiff Broadcast Music, Inc., (BMI) an organization that licenses music and collects royalties on behalf of its songwriters and composers. On behalf of its members BMI sent Meadowlake several cease and desist letters over the course of three years but received no response. Finally, it filed a lawsuit.
Barr did not perform any of the copyrighted music. Rather, the bands that played the songs, the DJs who played the recordings or the customers who used the jukebox were the active persons in terms of affecting a performance of copyrighted works. But the Court was not moved by Barr’s “solo performance” on appeal (Barr not only represented himself, but both his son and the restaurant declared bankruptcy and escaped the lawsuit). Even though Barr had no knowledge of the infringing performances, the Court focused on the fact that he had the authority to stop the music, but did not and profited from the performances.
Even the limited liability nature of the restraint did not save Barr from personal liability because that legal structure did not affect Barr’s right and ability to police the infringements or his financial interest in the infringements. Indeed, the 6th Circuit found Barr was vicariously liable precisely because he profited from the infringements even while refusing to stop the music.
Copyrights / Involuntary Transfer
Funkadelic Master Sound Recordings Can Be Involuntarily Transferred to a Court-Appointed Receiver to Satisfy Judgment *Web Only*
Addressing the issue of whether a lower court abused its discretion by appointing a receiver and authorizing the sale of master sound recordings to satisfy monetary judgments, the U.S. Court of Appeals for the Ninth Circuit affirmed the lower court’s decision, finding that the Copyright Act did not protect the defendant from the involuntary transfer of his copyrighted works because the defendant was not the original author of the works. Hendricks & Lewis PLLC v. Clinton, Case No. 13-35010 (9th Cir., June 23, 2014) (Christen, J.).
Hendricks & Lewis (Hendricks) is a law firm that performed legal services for George Clinton. Clinton failed to pay Hendricks for all legal fees incurred. After securing an arbitration award, Hendricks petitioned for and received judgment from the lower court confirming the arbitration award.
Clinton later sued Hendricks for legal malpractice. Hendricks asserted judgment collection counterclaims and moved for an order authorizing the sale of master sound recordings to satisfy judgment that had been entered. Hendricks also filed a separate action requesting appointment of a receiver and an order directing the assignment of the recordings to the receiver. Hendricks’ counterclaims and later action were consolidated. The district court appointed a receiver, assigned the rights in the recordings to the receiver and authorized the sale of the recordings by the receiver to satisfy the judgment, if necessary. Clinton appealed.
The 9th Circuit found that Clinton’s copyrights in the sound recordings were subject to execution to satisfy judgments entered against him. Federal Rule of Civil Procedure 69(a), which governs execution proceedings, states that execution proceedings are governed by state law, unless a federal statute governs. Washington law states that “all property” is subject to execution, and the 9th Circuit found no federal statute that directly addressed whether copyrights are subject to execution to satisfy a judgment. Relying on the historic kinship between patent law and copyright law, the court relied on a case involving patents to conclude that copyrights, like patents, are a form of intangible personal property that are subject to execution.
The 9th Circuit rejected Clinton’s argument that § 201(e) of the Copyright Act protects Clinton’s copyrights from Hendricks’ judgment collection efforts. This statute provides that “an individual author’s” ownership of a copyright cannot be involuntarily transferred if it “has not previously been transferred voluntarily” by the author. Here, the court found that Clinton was not the original author of the sound recordings because he signed a “works made for hire” contract with Warner Bros. that made Warner Bros. the original author. The Copyright Act provides that, in the case of a work made for hire, the person for whom the work was made is considered the author. Further, the court found that, even if Clinton were the author for purposes of § 201(e), he voluntarily transferred his rights to Warner Bros., thereby fully nullifying the applicability of that statutory provision.
The 9th Circuit also found that the lower court did not abuse its discretion by appointing a receiver to manage or sell ownership of Clinton’s sound recording copyrights. The 9th Circuit found that a receiver may be appointed after judgment, in order to give effect to the judgment, if it is reasonably necessary and other remedies are not available or not adequate. The 9th Circuit found that the lower court’s solution of appointing a receiver and having the receiver attempt to use the master sound recordings to satisfy judgment, without sale if possible, was not an abuse of discretion and was reasonably necessary. Given the prior litigation history, the 9th Circuit found that this solution was the only adequate solution to secure ample justice for the parties.