IP Update, Vol. 18, No. 6 - McDermott Will & Emery

IP Update, Vol. 18, No. 6



Patents / Licensing

The 'Super Powered' Rule of Stare Decisis Defeats Spider Man

The Supreme Court of the United States, in a 6-3 decision, left undisturbed the rule from Brulotte v. Thys Co. (1964), invoking stare decisis and rejecting arguments seeking to overturn the rule barring patent royalty agreements that obligate payment of post-patent expiration royalties. Kimble v. Marvel Entertainment, LLC, Case No. 13-720 (Supr. Ct., June 22, 2015) (Kagan, Justice) (Alito, Justice dissenting). In Kimble, the Court answered “No” to the question of whether parties to a patent license may agree that a licensee must continue paying royalties based on sales of products after the licensed patent(s) expire, and continuing the rule that such agreements are unlawful per se.

Since Brulotte was decided 51 years ago, many courts and commentators have criticized the rule it laid down as wrongly decided as a matter of economic policy.


When the Supreme Court decided Brulotte, it prohibited the extension of the “patent monopoly” beyond the term of the patent. The Court held that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” In other words, once the patent expires, the invention is dedicated to the public, and the patent owner cannot continue to demand royalties for use of the patented invention after expirations of the patent term. In dicta, however, the Court distinguished impermissible payments due for use of an invention during the post-expiration period from “deferred payments for use during the pre-expiration period,” which remained permissible.


In this case, an inventor (Kimble) licensed a patent on a novelty Spider Man web-slinging toy to Marvel Entertainment. The parties, unaware of Brulotte at the time of licensing, agreed to a license whereby Marvel would pay Kimble an upfront sum plus a 3 percent royalty for all sales going forward. The license agreement included no fixed term. However, after Marvel learned of the Brulotte rule, it filed a declaratory judgment action, seeking a ruling that it could cease paying Kimble royalties as of the expiration of Kimble’s patent term in 2010. The district court agreed with Marvel, and the U.S. Court of Appeals for the Ninth Circuit affirmed. (IP Update, Vol. 16, No. 8).

Stare Decisis

In affirming the Ninth Circuit, the Supreme Court rejected Kimble’s arguments seeking to overturn Brulotte. Kimble argued that the economic rationale underlying Brulotte was no longer correct, and that prohibiting post-expiration royalties made it inefficient and difficult to allocate risks and rewards, especially for patented technology that may take a significant amount of time to commercialize. Marvel responded simply that stare decisis required the Court to re affirm Brulotte.

The Supreme Court agreed with Marvel. Justice Kagan explained that stare decisis is compelled adherence to Brulotte, and that there was no “special justification” for overturning it. Kagan observed that Congress could overrule the Court’s decision if Congress disagreed with it, and noted that Congress had actually not changed the rule despite repeated amendments of the patent laws since the Court’s Brulotte decision. In an apparent nod to the subject matter of the Marvel Spider Man product, Justice Kagan intoned that the rule of stare decisis is “super powered” and it would require “super special justification” to overturn Brulotte.

After summarizing Kimble’s economic criticisms of the rule in Brulotte—namely that the Brulotte Court was mistaken about the anticompetitive effect of post-expiration royalties and that the rule in Brulotte stifled innovation—the Supreme Court explained that even if true, such arguments provided no grounds to deviate from stare decisis. Accordingly, the Supreme Court affirmed the rule that “when the patent expires, the patentee’s prerogatives expire too, and the right to make or use the article, free from all restriction, passes to the public.” The Court added that post-expiration royalty obligations “conflict with patent law’s policy of establishing a ‘post-expiration … public domain’ in which every person can make free use of a formerly patented product.”

The Court also re-confirmed the dicta in Burlotte distinguishing between permissible and impermissible licensing structures and acknowledged that deferred payments, if based on activity occurring before the patent expiration, are permissible:

[P]arties can often find ways around Brulotte, enabling them to achieve those same ends. To start, Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights.

The Dissent

Justice Alito (joined by Chief Justice Roberts and Justice Thomas) dissented, asserting that Brulotte was not based on interpretation of the Patent Act, but based on economic theory, which has been “debunked.” The dissent further argued that Patent Act did not demand that the royalty term be compressed to fall within the patent term, and that there are often “good reasons why parties sometimes prefer post-expiration royalties over upfront fees.” For example, such arrangements may yield economic efficiencies where parties are “unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation.” The dissent also explained that the majority decision undermined the parties’ agreed-upon bargain and expectations. Finally, the dissent argued that stare decisis should not insulate Brulotte.

Practice Note: Kimble is a reminder to patent holders, patent licensees and patent practitioners alike of the permissible ways that they can structure royalties due for conduct during the period covered by a patent without incurring Brulotte’s—and now Kimble’s—per se rule against post-expiration royalties. However, as it did for Kimble, the Brulotte rule creates a trap for the unwary.

Going forward, parties will likely take increased care in drafting licenses to take advantage of the Incredible-Hulk-sized exception to the Brulotte rule, i.e., that a license can be structured to provide for “deferred,” “post-expiration” royalties based on pre-expiration use of a licensed patent. The Court clarified Brulotte’s distinction between impermissible enforcement of a patent to preclude post-expiration infringement, and permissible “deferred payments” based on infringing activities occurring before patent expiration. This reinforces the ability of parties to contractually agree to alternative payment arrangements. For example, instead of paying up-front royalties, Kimble acknowledges that parties may contractually extend royalty obligations beyond the life of the patent in the form of “deferred payments,” provided the royalty obligation is premised on pre-expiration use of the patented technology.

Having considered this matter a second time, and Justice Kagan’s invitation for legislative attention if Congress disagreed with Brulotte, the Kimble decision may motivate Congress to reconsider bills that it has previously “rebuffed” and that “would have replaced Brulotte’s per se rule with the same antitrust-style analysis Kimble now urges.” Of course, Congress itself may prefer the ease of applying the rule from Brulotte as contrasted with, in the Court’s words, the “elaborate” rule-of-reason inquiry, with its “notoriously high litigation costs and unpredictable results.”

Patents / Inducement

Good Faith Belief in Invalidity No Defense to Active Inducement

Paul Devinsky

The U.S. Supreme Court (Justice Kennedy writing for the majority) has now eliminated a defense that has been available to parties accused of actively inducing patent infringement under 35 USC § 27 (b). The Court held that a good-faith belief of invalidity of a patent is not a defense to a charge of inducing infringement. Commil USA, LLC v. Cisco Systems, Inc., Case No. 13-896 575 (May 26, 2015) (Scalia, J., dissenting, joined by Roberts, C.J.) (Breyer, J. took no part in the case).

In reversing the U.S. Court of Appeals for the Federal Circuit on the issue presented, the Supreme Court held that Cisco’s good-faith belief that the Commil patent at issue was invalid was not a defense to Commil’s claim that by selling products for its customers’ use Cisco induced infringement.

However, the Supreme Court also took the opportunity to reaffirm its 2012 holding in Global-Tech Appliances, Inc. v. SEB S.A. regarding the requirements for proving induced infringement. The Court confirmed that in order to prove active inducement a patent owner must show that the accused infringer has both knowledge of the patent and knowledge that the induced acts constitute patent infringement. In doing so the Court rebutted the position of Commil and the U.S. government, both of which argued that knowledge that the induced acts constitute infringement was not required for a finding of induced infringement.


Commil is the owner of a patent directed to short-range wireless networks and, in the words of the Court, claims “a method of providing faster and more reliable communications between devices and [a wireless network] base stations.” Commil sued Cisco, a maker and seller of wireless network equipment, alleging both direct infringement and active inducement in selling its equipment for others to use. On the inducement count, Cisco raised the defense that it had a good faith belief that Commil patent was invalid, but the district court found evidence that belief was “inadmissible.”

On appeal, the Federal Circuit found the district court had erred in excluding Cisco’s evidence of its good-faith belief that the patent was invalid. Commil then petitioned the Supreme Court for certiorari and this appeal followed.

Global-Tech Revisited

During the pendency of Commil’s action in the district court, but after the jury verdict, the Supreme Court issued its opinion in Global-Tech, holding that in order to be liable for inducement, the accused infringer must both know of the patent and that “the induced acts constitute patent infringement.” In its charge to the jury (and over Cisco’s objection), the district court instructed that liability for inducement exists if the defendant “knew or should have known that its actions would induce infringement” (emphasis added). Although the Federal Circuit found that instruction erroneous based on Global-Tech, Commil and amicus, the U.S. government argued to the Supreme Court that Global-Tech should be read as only requiring knowledge of the patent to support a claim of inducement, thus occasioning the Court to revisit its Global-Tech ruling, if only to emphasize that “Global-Tech’s explicit holding that liability for induced infringement can only attach if the defendant knew of the patent and knew as well that ‘the induced acts constitute patent infringement’.”

Infringement Versus Invalidity

Justice Kennedy, starting with the premise stated in Global-Tech that intent is an element of active inducement under § 271(b), explained that the intent required relates to acts of infringement and “that infringement and invalidity are separate matters under patent law.” The Court then concluded that “permitting a defense of belief in invalidity would conflate issues of infringement and validity” and would undermine the presumption of validity.

Quoting from Judge Newman’s dissent in Commil (and alluding to the dissent here), Justice Kennedy dismissed the argument that an invalid patent cannot be infringed as a “simple truth” that ignores the statutory framework. As Justice Kennedy explained “invalidity is not a defense to infringement, it is a defense to liability” and “cannot negate the scienter” requirement.

The Court went on to explain that infringement and validity are “separate issues” under the patent law and cited various aspects of the patent laws evidencing the intent of Congress to establish this dichotomy. Rather than a defense to infringement, the Court reasoned that any belief regarding invalidity should be tested in a declaratory judgment claim (or counterclaim) or in post-issuance PTO proceeding.

The Dissent

In his dissent, Justice Scalia (joined by Chief Justice Roberts) found the majority thesis regarding the divisibility between infringement and invalidity “not persuasive.” Scalia took particular aim at the majority explanation that it did not want “to create a defense based on good faith belief in invalidity” (emphasis in original). In the view of the dissent, the job of the Court is not to create defenses, but is simply to interpret the patent laws. Given that Global-Tech makes knowledge of infringement a requirement for active inducement and there can be no such knowledge in the case of an invalid patent, the dissent would find that a “good faith belief in invalidity is a defense” to inducement.

Practice Note: The majority opinion takes a detour to justify its holding by noting that frivolous cases of induced infringement can be addressed through administrative proceedings at the U.S. Patent and Trademark Office, such as reexaminations and proceedings before the U.S. Patent Trial and Appeal Board (PTAB), as well as sanctions and fees imposed by district courts. As the majority notes, “[T]hese safeguards, combined with the avenues that accused inducers have to obtain rulings on the validity of patents, militate in favor of maintaining the separation expressed throughout the Patent Act between infringement and validity.” However, it is not self-apparent that the availability of these venues and remedies address the fundamental issue raised by the dissent.

Patents / Means + Function Claim Elements

What Was Old is New Again for Means + Function Claim Elements

Paul Devinsky

The U.S. Court of Appeals for the Federal Circuit, sitting en banc for the limited purpose of revisiting when claims invoke the means-plus-function language of 35 U.S.C. § 112, ¶ 6 (§ 112(6)) (now § 112(f)) replaced a part of an earlier (November 2014) panel decision (IP Update, Vol. 17, No. 12), with the full court speaking only to the means-plus-function issue addressed in the earlier panel decision. In reversing precedent that created a “strong” presumption that § 112(6) will not govern when the claim drafter has not signaled an intent to invoke the statutory requirements for means-plus-function claims by using the term “means,” the Federal Circuit has now ruled that a claim will be considered a § 112(6) means-plus-function term based on whether the words of the claim recite a specific function that requires corresponding structure when read by a person of ordinary skill in the art. Williamson v. Citrix Online, LLC et al., No. 113-1130 (Fed. Cir., June 16, 2015) (en banc).


The claim limitation in issue is “a distributed learning control module” for receiving and relaying communications between presenters and audience members. In the earlier panel opinion, the majority concluded that § 112(6) did not apply—in large part because the claim limitation did not include the word “means.” In its analysis, the panel majority, citing to the Federal Circuit’s 2004 decision in Lightning World, explained that “[a] claim expression cannot be said to be devoid of structure if it is used in ‘common parlance or by persons of skill in the art to designate structure, even if the term covers a broad class of structures and even if the term identifies the structures by their function.’”

In dissent, Judge Reyna argued that the claim term “module” was a nonce word that referred to functions that lacked corresponding structure in the specification.

The En Banc Ruling

The full court has now adopted much of the reasoning in Judge Reyna’s panel dissent, but continued to adhere to a burden-shifting framework. Although the en banc decision maintains a presumption against applying the statutory requirements of § 112(6) based on the presence or absence of the word “means,” that presumption is no longer a “strong” one. As the en banc court stated: “[I]n making the assessment of whether the limitation in question is a means-plus-function term subject to the strictures of § 112, para. 6, our cases have emphasized that the essential inquiry is not merely the presence or absence of the word ‘means’ but whether the words of the claim are understood by persons of ordinary skill in the art to have a sufficiently definite meaning as the name for the structure.” If a challenger demonstrates that a claim term fails to recite sufficiently definite structure, or recites a function without an algorithm to perform the function, the presumption against means-plus-function requirements may be rebutted. Essentially, the court went back to the approach it had used prior to Lightning World, abandoning the “strong” presumption that would result in § 112(6) “seldom” being invoked where there was no recitation of “means,” noting that the now overruled precedent had “the inappropriate practical effect of placing a thumb on what should otherwise be a balanced analytical scale.”

Applying the revised framework, the en banc panel concluded that § 112(6) applied here and the claim term was indefinite under § 112(2) due to a lack of disclosed structure corresponding to the recited function. In doing so, the en banc panel reversed course from the November 2014 panel decision, concluding that the term “distributed learning control module” was to be treated as a means-plus-function limitation because, as district court had found, the term “module” was a generic term that operates as a substitute for the word “means.”


Judge Newman dissented from the en banc holding, warning that in her view, departure from existing precedent introduced additional uncertainty that would deny patent applicants a choice in drafting claims, complicate examination at the United States Patent and Trademark Office (PTO) stage, invite litigation and disincentivize innovation. Judge Newman supported her conclusion that the en banc holding reduces stability during claim construction by tracing the legislation history of the Patent Act, the PTO Examination Guidelines and patent prosecution treatises addressing best practices for claim drafting.

Practice Note: In concluding that “module” is a “nonce word” that can operate as a substitute for “means” and invoke § 112(6), the en banc panel also identified a non-exclusive list of additional terms it considers generic, such as “mechanism,” “element” and “device.” The court’s apparent willingness to address what it perceives as a “proliferation of functional claiming” will require those drafting claims to pay particular attention to the structure and/or algorithms set forth in the specification or risk a finding of indefiniteness.

It is expected that accused infringers will now be able to challenge many patents where the asserted claims include broad and largely functional recitation—a situation frequently encountered in claims involving software.

Patents / Joint Infringement

A Single Entity Must Perform All Steps of a Method Claim in Order to Commit Direct Infringement

Following a remand from the Supreme Court, the U.S. Court of Appeals for the Federal Circuit affirmed its prior panel decision, holding that direct infringement liability of a method claim under 271 U.S.C. § 271(a) only exists when all of the steps of a claim are performed by or attributed to a single entity (including, for example, a principal-agent relationship, a contractual arrangement or a joint enterprise). Akamai Techs., Inc. v. Limelight Networks, Inc., Case Nos. 09-1372, -1380, -1416, -1417 (Fed. Cir., May, 13, 2015) (Linn, J.) (Moore, J., dissenting).

Akamai is the exclusive licensee of a patent that claims a method of delivering electronic data using a content delivery network (CDN). The patent provides that certain components of a provider’s website (e.g., large files, such as video or music files) can be designated, or tagged, to be stored on servers and accessed by internet users, which allows for increased speed of access to the content. Limelight operates a CDN and carries out several of the claimed steps, but does not tag the components to be stored on its servers. Rather, Limelight requires its customers to perform their own tagging. Limelight’s customers control their own use of Limelight’s CDN and are not contractually obligated to follow Limelight’s instructions.

At trial, the district court concluded that Limelight could not be held liable for direct infringement because Limelight itself did not perform all steps of the claimed method and because the customers performing the remaining steps of the claimed method were not under the control of Limelight. On appeal, the Federal Circuit affirmed, holding that the customers acted for their own benefit and were neither agents of Limelight nor under Limelight’s control. As a result, Limelight could not be found to have committed direct infringement. Without a single entity committing the predicate direct infringement, there could be no induced infringement under §271(b). See IP Update, Vol. 15, No. 9. Akamai successfully petitioned for a writ of certiorari at the Supreme Court.

The Supreme Court only considered the question of whether a party can be held liable for induced infringement under §271(b), even if no one had committed direct infringement under §271(a). The Supreme Court held that there can be no induced infringement based on divided direct infringement (IP Update, Vol. 17, No. 6). Since the parties did not address the question of whether Limelight had, in fact, committed direct infringement under §271(a) the Supreme Court remanded the case back to the Federal Circuit to revisit that foundational question.

On remand, the Federal Circuit affirmed its prior holding that Limelight had not committed direct infringement under §271(a) because Limelight did not itself perform all of the steps of the claimed method, nor was it vicariously liable for the activities of its customers. Citing to its prior decisions in BMC and Muniauction, the Court explained that in some circumstances, a party may act as a “mastermind,” whereby they exercise sufficient “direction or control” over the actions of another, such that the actions can be attributed to the mastermind. The Court recognized that these circumstances may arise in principal-agent relationships, contractual relationships, and in joint enterprises. In such circumstances, §271(a) serves to protect patentees from a party that attempts to unfairly avoid infringement merely by contracting with another party to perform one of the steps of a claimed method. But in this case, the Court concluded that Limelight did not exercise control over its customers. Customers do not become agents merely because Limelight provides written manuals explaining how to operate Limelight’s product. Moreover, the contracts between Limelight and its customers did not obligate the customers to perform any of the method steps on behalf of Limelight. Rather, the customers were acting for their own benefit.

The Federal Circuit also considered whether §271(a) incorporates joint tortfeasor liability and concluded that “[u]nquestionably, it does not.” Rather, the Court observed that, as legislated, the “single entity rule” applies to §271(a). Indeed, Congress specifically enacted §§271(b) and (c) to address acts involving inducing others to infringe or contributing to infringement. To apply joint tortfeasor liability to 271(a) would render these subsections redundant.

In an extensive dissent, Judge Moore articulated that the “single entity rule,” newly articulated in BMC and Muniauction, is inconsistent with the actual statute and common law and create a “gaping loophole in infringement liability.” For example, Moore notes that §271(a) attributes direct infringement to “whoever” makes, uses or sells the patented invention, which necessarily must include the collective actions of multiple persons. Indeed, Moore argues that throughout other sections of the patent act, the term “whoever” is given such collective meaning. Moreover, Moore notes that prior to enactment of the Patent Act, common law frequently ascribed liability for direct infringement of method claims to joint infringers, but did not limit application to vicarious liability.

Practice Note: Akamai has now petitioned the Federal Circuit for en banc review, seeking that the full court review its prior decisions on the subject of joint infringement liability.

Patents / Damages

No "Apportionment" Requirement for Design Patent Damages

Addressing the issue of damages for trade dress and design patents, the U.S. Court of Appeals for the Federal Circuit upheld the bulk of Apple’s roughly $930 million damages award, noting that there is no apportionment required for design patent based damages. Apple, Inc. v. Samsung Elecs. Am., Inc., Case Nos. 14-1335, 15-1029 (Fed. Cir., May 18, 2015) (Prost, C.J.).

After a jury awarded Apple more than $1 billion in damages for diluting Apple’s trade dress and infringing Apple’s design and utility patents, the district court reduced the award to approximately $690 million and ordered a retrial on some of the damages issues. After a retrial, a second jury awarded an additional $290 million to Apple, bringing the total damages owed by Samsung to $930 million.

Samsung appealed the jury verdicts, challenging the findings of trade dress dilution and infringement of design and utility patents. With respect to trade dress infringement, Samsung argued that Apple’s trade dress—generally directed to Apple’s well-known rectangular product with rounded corners and flat surface—was functional and therefore not protectable. The Federal Circuit agreed and reversed the portion of the award based on trade dress infringement.

With regard to damages awarded for Samsung’s infringement of Apple’s design patents, Samsung argued that it was legal error to allow the jury to award Apple all of Samsung’s profits on the infringing smartphones. According to Samsung, damages should have been limited only to profits that are causally attributable to Samsung’s infringement. In other words, Samsung argued that Apple was required to apportion damages for infringement of design patents, the same way as is required for infringement of utility patents.

In rejecting Samsung’s argument, the Federal Circuit relied on the express language of 35 U.S.C. § 289, which provides that the infringer of a design patent is “liable to the [patent] owner to the extent of [the infringer’s] total profit.” In other words, § 289 explicitly authorizes an award of the total profits from an article of manufacture bearing the patented design. In comparison, in accordance with § 284 a utility patent owner is only entitled to damages “adequate to compensate for the infringement, but in no even less than a reasonable royalty.” Addressing criticism from an amicus brief, the Federal Circuit noted that while “Amici 27 Law Professors argues that an award of a defendant’s entire profits for design patent infringement makes no sense in the modern world,” the Court is “bound by what the statute says, irrespective of policy arguments that may be made against it.”

Practice Note: Since § 298 authorizes the owner of an infringed design patent to recover the infringer’s total profits without the need to apportion damages in any way, asserting design patents may be attractive to patentees.

Patents / Means + Function Claims

Only Basic Functions of a Processor Avoid Need for Disclosed Algorithm

Alexander P. Ott

Addressing the question of what corresponding structure must be disclosed to support a means-plus-function claim element, the U.S. Court of Appeals for the Federal Circuit upheld a district court finding that eight computer-implemented means-plus-function elements were indefinite because the specification failed to disclose any algorithms. EON Corp. IP Holdings LLC v. AT&T Mobility LLC, Case No. 14-1392 (Fed. Cir., May 6, 2015) (Prost, C.J.).

The district court granted summary judgment of invalidity in two consolidated district court cases, concluding that eight means-plus-function elements, each reciting computer-implemented functions, were indefinite. The patent owner admitted that the specification did not disclose any algorithms for the recited functions, but argued that they were achievable without special programming and thus covered by the exception for such functions as set forth in the 2011 Federal Circuit case of In re Katz (IP Update, Vol. 15, No. 3), an exception that provides that certain recited functions were not indefinite where a general purpose competitor “need not be specially programmed to perform the recited functions.” The district court analyzed the special programming question based on whether the programming was commercially available and concluded that the means-plus-function elements did not qualify for the exception because they were not available in off-the-shelf programs. EON appealed.

The Federal Circuit disagreed with the district court’s off-the-shelf analysis and also rejected the EON’s arguments based on the relative simplicity of the programming involved. The Court instead found that the algorithm exception only covers so-called “basic” processor functions that are “coextensive” with the processor itself—such as processing, receiving and storing—and that all other computer-implemented functions require a disclosed algorithm. Next, the Federal Circuit rejected EON’s alternative argument that no algorithm was required where an ordinarily skilled artisan could have implemented the claimed software function, explaining that the knowledge of a skilled artisan is irrelevant in cases where no algorithm whatsoever is disclosed. In cases where there is an algorithm of disputed adequacy the knowledge of the artisan is relevant, but only as the viewpoint from which the issue of adequacy is determined.

Relying on the district court’s factual findings that implementing the claimed functions would require special code and resort to algorithms outside the specification, the Federal Circuit went on to affirm the district court’s indefiniteness holding.

Patents / Induced Infringement

No Induced Infringement Where Off-Label Use of a Drug is Not "Inevitable" *Web Only*

Finding that a drug label’s language did not rise to the level of “active encouragement” that would induce doctors to infringe, the U.S. Court of Appeals for the Federal Circuit upheld the district court’s denial of a preliminary injunction. Takeda Pharms. U.S.A., Inc. v. West-Ward Pharm. Corp., Case Nos. 15-1139, -1142 (Fed. Cir., May 6, 2015) (Dyk, J.) (Newman, J., dissenting).

Both parties market colchicine drug formulations, which have been known for centuries to be useful in preventing and treating gout. Takeda’s patents are directed to specific methods of using colchicine for treatment of acute gout flares, whereas Hikma’s allegedly infringing product, Mitigare, is marketed for prevention of gout. According to Hikma’s drug label, Mitigare is “indicated for prophylaxis” and the “safety and effectiveness of Mitigare for acute treatment of gout flares during prophylaxis has not been studied.” The label also stated that “if you have a gout flare while taking [Mitigare], tell your healthcare provider.”

Takeda argues that the “tell your healthcare provider” instruction will “inevitably” lead to physicians who are consulted to advise patients taking Mitigare for prophylaxis to simply increase their dose of Mitigare to treat acute gout flares and that Hikma was aware of or willfully blind to this possibility. To support its argument, Takeda presented expert opinion and medical literature evincing that at least some physicians would simply tell patients with acute gout, who are already using Mitigare, to simply increase their Mitigare dosage to match the acute gout dosing instructions from Takeda’s own competing colchicine treatment.

The Federal Circuit rejected Takeda’s argument, concluding that “vague label language cannot be combined with speculation about how physicians may act to find inducement.” According to the Federal Circuit, inducement in the context of pharmaceutical labeling requires that the Mitigare label expressly “encourage, recommend, or promote infringement.” Because a physician would have to “look outside the label” (e.g., to the label of Takeda’s own colchicine product) in order to know how to use Mitigare in an infringing way, the Mitigare label did not rise to the level of “active encouragement.”

Moreover, inducement requires that the label “necessarily” and “inevitably” lead to infringement. By contrast, here there is “no evidence that the label would necessarily lead doctors who are consulted by patients taking Mitigare to prescribe an off-label use of it to treat acute gout flares.” Although Takeda showed that some physicians would use Mitigare in an off-label (infringing) manner, according to the Court, “[s]peculation or even proof that some, or even many, doctors would prescribe Mitigare for acute flares is hardly evidence of inevitability.”

Judge Newman dissented, noting that the panel’s decision runs counter to the purpose of the Hatch-Waxman Act by “provid[ing] a disincentive by negative enforcement of improvement patents by the simple expedient of omitting the improvements from the label.”

Practice Note: When drafting method of treatment claims, think prospectively and seek claims for both on-label uses and potential off-label uses.

Patents / Hatch-Waxman Act

Activities For sNDA and Citizen's Petition Protected by "Safe Harbor"

In a case addressing the “safe harbor” provision of 35 U.S.C. § 271(e)(1), the U.S. Court of Appeals for the Federal Circuit affirmed the district court’s ruling that information submitted to the U.S. Food and Drug Administration (FDA) for the purpose of filing a citizen’s petition and a supplemental New Drug Application (sNDA) is covered by the safe-harbor exemption, but remanded to determine whether other post-filing activities infringed the plaintiff’s patent. Classen Immunotherapies, Inc. v. Elan Pharmaceuticals, Inc., Case No. 214-1671 (Fed. Cir., May 13, 2015) (Lourie, J.).

Classen is the owner of a patent directed to a method for accessing and analyzing data on a commercially available drug to identify a new use of that drug and then commercialize that new use. In 2001, Elan, in response to discovering that another company was performing studies on its product Skelaxin, tested the effect of food on the bioavailability of its drug. Based on the test results, Elan filed with the FDA both a citizen’s petition requesting a change in the requirements for approval of a generic form of Skelaxin and a sNDA to revise Skelaxin’s product label. Both the citizen’s petition and the sNDA were approved. Elan also filed two patent applications based on the same test data. In 2004, Classen sued Elan alleging that Elan infringed Classen’s patent when it studied the effect of food on the bioavailability of Skelaxin, used the clinical data to identify a new use of the drug and commercialized the new use. The district court dismissed the case, finding both the filing of the citizen’s petition and the sNDA to be protected activities under the safe harbor provision of § 271(e)(1). After a multi-year stay during which the patent was reexamined, Classen moved for reconsideration based on the 2011 decision in Classen Immunotherapies v. Biogen IDEC (IP Update, Vol. 14, No. 9) where the Federal Circuit held that some post-approval submissions are not covered by the “safe harbor.” After the district court denied reconsideration, Classen appealed.

The panel quickly found that the filing of both the citizen’s petition and the sNDA were activities protected by the safe harbor, explaining that the § 271(e)(1) exemption from infringement extends to all uses of patented inventions that are reasonably related to the development and submission of any information to the FDA, not just activities seeking approval of a generic drug. The panel further found that both the sNDA and citizen’s petition filings were not routine post-filing activities, which, under Federal Circuit precedent could have brought them outside of the safe harbor provision. However, the panel found that the district court failed to consider whether the filing of Elan’s patent application, or the selling of Skelaxin with information derived from Elan’s clinical studies, was an act of infringement. Therefore, the panel remanded to the district court for additional development of the record.

Although the panel made no determination concerning Elan’s post-filing activities, the panel provided guidance “to assist the district court in its analysis of infringement, if the court reaches that issue on remand,” which made clear that it was highly skeptical of plaintiff’s infringement arguments. The panel also noted in a footnote that it expressed no opinion on whether Classen’s claims, which were reexamined in 2010, were patentable under the Supreme Court’s 2014 Alice Corp. v. CLS Bank ruling (IP Update, Vol. 17, No. 7).

Patents / Validity / Claim Construction / Reissue

Intervening Reissue Still Bound by Earlier Claim Construction

In a decision invalidating reissue patent claims, the U.S. Court of Appeals for the Federal Circuit affirmed the district court’s application of the law-of-the-case doctrine and mandate rule, finding that the reissue claims were impermissibly broadened in violation of 35 U.S.C. § 251. ArcelorMittal France v. AK Steel Corp., Case No. 14-1189 (Fed. Cir., May 12, 2015) (Hughes, J.).

In 2010 ArcelorMittal sued AK Steel and others for infringement of a patent directed to a specific type of steel sheet that has a “very high mechanical resistance” after thermal treatment. The district court construed the claim term “a very high mechanical resistance” as “a tensile strength greater than 1500 MPa.” On appeal, after a jury trial, the Federal Circuit affirmed the district court’s construction of “a very high mechanical resistance” but reversed and remanded on other grounds.

While the appeal was pending, ArcelorMittal filed a reissue application in an attempt to overcome the district court’s unfavorable claim construction. The reissue application issued into a patent in 2013 and included the same independent claim as the original patent plus a number of dependent claims, including a dependent claim that claimed “[t]he coated steel sheet of claim […], wherein said mechanical resistance is in excess of 1000 MPa.” ArcelorMittal then amended its complaint on remand to substitute in the reissue patent. AK Steel moved for summary judgement on the ground that claims of the reissue patent “were invalid because they were impermissibly broadened in the reissue proceedings.” After the district court granted the motion, ArcelorMittal appealed.

ArcelorMittal argued that the reissue claims are not broader than the original claims because the issuance of the reissue patent demonstrates that the Patent Office believed the original claim term—“very high mechanical resistance”—was broader than previously construed.

The Federal Circuit, applying the principles of the law-of-the-case doctrine (which “posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case”) and the mandate rule (which states that “an inferior court has no power or authority to deviate from the mandate issued by an appellate court”), explained that a court may only deviate from a decision in a prior appeal where “extraordinary circumstances” exist, which is rare.

ArcelorMittal argued that the issuance of the reissue patent is “new evidence” sufficient to constitute “extraordinary circumstances,” allowing it to deviate from the prior construction of the term “very high mechanical resistance.” The Federal Circuit disagreed, concluding that “[t]he successful prosecution of the reissue patent is not ‘new evidence’ sufficient to trigger the extraordinary circumstances exception to the mandate rule and the law-of-the-case doctrine. Permitting a reissue patent to disturb a previous claim construction of the original claims would turn the validity analysis under 35 U.S.C. § 251 on its head.”

As the Federal Circuit concluded, under the law-of-the-case doctrine, the district court was bound by its previous construction of the term “a very high mechanical resistance” notwithstanding the addition of the new dependent claim, explaining that the new claim improperly broadened the scope of the original claims outside the two-year period of broadening reissues and were therefore invalid.

Patents / Interferences / Jurisdiction

District Courts Have No Jurisdiction to Review Board Decision for Interferences Declared After September 15, 2012 *Web Only*

Addressing the impact of the America Invents Act (AIA) on judicial review of interference proceedings, the U.S. Court of Appeals for the Federal Circuit confirmed that a district court may not review Patent Trial and Appeal Board (PTAB or Board) decisions under 35 U.S.C. § 146 for interferences filed after September 2012. Biogen MA, Inc. v. Japanese Foundation for Cancer Research, Case No. 2014-1525 (Fed. Cir., May 7, 2015) (Dyk, J.).

This case arises out of an interference between Biogen and the Japanese Foundation for Cancer Research (JFC), where the Board estopped Biogen from continuing an interference based on the results of two earlier interferences between the same parties. Biogen challenged the Board’s determination in district court under pre-AIA 35 U.S.C. § 146. The district court, however, dismissed Biogen’s case for lack of subject-matter jurisdiction, holding that the AIA eliminated its § 146 jurisdiction to review decisions from interference proceedings declared after September 15, 2012. The district court then transferred the case to the Federal Circuit for review.

The Federal Circuit first reviewed the threshold question of whether it even had jurisdiction to review the district court’s decision. After concluding that such jurisdiction existed, the Federal Circuit turned to the substance of the district court’s jurisdictional analysis. Under pre-AIA law, parties had two avenues for review of decisions in interference proceedings. Under pre-AIA § 146, a party could challenge the Board’s decision in district court, while under 35 U.S.C. § 141, a party could appeal the Board’s decision to the Federal Circuit. These were alternative options, meaning that by choosing one option a party waived recourse to the other. As the Federal Circuit explained, if review under §146 were proper, then Biogen would have waived its right to review under § 141, and the Federal Circuit would not have subject-matter jurisdiction over the action. Thus, the key question on appeal was whether the AIA eliminated judicial review under § 146.

Biogen’s argument was based on AIA § 3(n)(1), which generally states that the new AIA provisions apply only to applications with an effective filing date on or after March 16, 2013. Biogen argued that because this provision does not expressly carve out judicial review of interference proceeding, it “implicitly preserves interference proceedings and judicial review provisions concerning interference proceedings for patent applications filed before March 16, 2013, including § 146 review for Board decisions in interferences.”

The Federal Circuit did not agree, noting that the AIA included other provisions related to judicial review of interferences (§ 6(f)(3)(C)), which state that interferences filed before September 16, 2012 were still amenable to review under pre-AIA § 141 or 146. Originally, that provision did not explicitly provide for judicial review of interferences filed after September 15, 2012. But Congress corrected this omission, stating that judicial review under §141 was permissible for decisions in interferences filed after September 15, 2012. According to the Federal Circuit, viewing the plain language of AIA § 6(f)(3)(C) together with the congressional modification, and applying the canon of construction that the specific trumps the general, makes clear that pre-AIA § 146 review was eliminated for interference proceedings declared after September 15, 2012. For these reasons, the Federal Circuit concluded that it had jurisdiction to hear Biogen’s appeal under § 141 and proceeded to review the merits of the PTAB decision.

On the merits, the Federal Circuit affirmed the Board’s decision, finding that Biogen was estopped from establishing priority in the interference at issue because of interference estoppel. In particular, Biogen had already lost in two other interference actions that related to similar subject matter and did not meet its burden to show patentable distinctness in response to the Board’s show cause order.

Patents / Antitrust

Appellate Court Weighs In on Pharmaceutical "Product Hopping"

As the first court of appeals to address the issue of product hopping, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s grant of a preliminary injunction, finding that product hopping is anticompetitive and exclusionary under Section 2 of the Sherman Act. People of the State of New York v. Actavis PLC, Case No. 14-4624 (2d Cir., May 22, 2015) (Walker, J.).

The case involves “product hopping,” a practice by which brand name pharmaceutical companies reformulate their products with allegedly little or no therapeutic advantage, impeding generic manufacturers’ ability to take advantage of abbreviated new drug applications and state generic substitution laws as a means to extend the branded manufacturer’s period of legal monopoly. Product-hopping cases arise where the brand-name drug maker performs either a “hard switch”—eliminating the old formulation from the market completely—or a “soft switch”—changing focus to a new formulation, but leaving the old formulation on the market. In Actavis, the district court granted a preliminary injunction against Actavis’ plan to make a “hard switch” from its old formulation of Namenda to a new formulation, requiring Actavis to continue selling its old formulation of Namenda. Actavis appealed to the 2d Circuit.

On appeal, Actavis claimed that removal of the older inferior product would maximize Actavis’ return on investment in the new version and that the new version of Namenda was a substantial improvement over the older version. The 2d Circuit disagreed, finding that the procompetitive justification for the hard switch did not outweigh its anticompetitive effects. Ultimately, the Court believed Actavis’ motive in removing the old formulation from the market was to “forsake short-term profits to achieve an anticompetitive end.” The 2d Circuit concluded that while product improvements or product withdrawals alone are not anticompetitive, in this case Actavis’ plan to engage in both, simultaneously, would impede competition by coercing consumers to switch to the improved product, rather than persuading them on the merits of the product. The 2d Circuit condemned the “hard switch” as anti-competitively eliminating patients’ ability to access the generic version of the older formulation under state automatic substitution laws.

Practice Note: Consider involving antitrust counsel in your client’s pharmaceutical product life-cycle planning, especially if the client’s drug has a large share in its market. This issue will likely continue to develop, as an appeal in a second product hopping case has arisen in the U.S. Court of Appeals for the Third Circuit. In the 3d Circuit case, the Federal Trade Commission (FTC) has filed an amicus brief strongly supporting the pursuit of antitrust Section 2 cause of action against companies that choose to product hop and prevent generic competition. For now, however, the 2d Circuit’s decision provides insight as to one method by which courts may evaluate product hopping cases, i.e., by distinguishing between “soft switching” and “hard switching.”

Patent / Pleadings

Elimination of Rule 84 and Form 18 Could Increase Pleading Standards in Patent Cases

In an order issued in late April of this year, the U.S. Supreme Court, without comment, adopted changes to the Federal Rules of Civil Procedure that were approved in September by the Judicial Conference of the United States. The rule changes will take effect December 1, 2015 unless modified by Congress. As part of this order, the Supreme Court approved the elimination of Rule 84, which provides model forms that attorneys often rely on. Abolishing Rule 84 eliminates Form 18, which is a model patent complaint that essentially allows patent plaintiffs to file bare-bones complaints.

According to Form 18, a plaintiff is only required to put the defendant on notice of the claim by including little more than the name and number of the patent and a basic allegation of infringement in the complaint. Although most complaints are subject to the pleading standards established by the Supreme Court in the Twombly and Iqbal decisions, the Federal Circuit, in 2012, in the case of R+L Carriers (IP Update, Vol. 15, No. 6) ruled that with respect to pleading requirements in patent cases, Form 18 controls and Twombly and Iqbal do not apply. The elimination of Form 18 will likely subject patent complaints to the pleading standards of Twombly and Iqbal, which would require plaintiffs to demonstrate that their claims are plausible, rather than simply putting the defendant on notice of the claim.

Practice Note: Congress is currently considering bills that would raise patent pleading standards beyond what the new rule requires. The elimination of Rule 84 and potential elevation of the pleading standards may affect the ability of non-practicing entities (NPEs) to file vague complaints against multiple defendants across an industry; the type of litigation tactic that has historically forced defendants to incur asymmetrical discovery costs just to find out what products or activities were accused. As has been noted in congressional hearings, this is a situation that enables NPEs to extract quick settlements and profits as defendants seek to avoid those discovery costs. Competitor-initiated suits, which typically include a more detailed complaint, are unlikely to be impacted as these suits are filed with different strategies in mind.

Patents / Appeals

Expedited Patent Appeal Pilot Program

On June 15, 2015, the U.S. Patent and Trademark Office (USPTO) announced it was starting an Expedited Patent Appeal Pilot Program effective June 19, 2015. Under the Expedited Patent Appeal Pilot, an appellant can file a petition to have an appeal made special if the appellant also withdraws an appeal in a copending application. The USPTO’s goal is to render a decision on the Petition to Make Special within two months of filing the petition and to issue a decision on appeal no later than four months from the date the Petition to Make Special is granted. Currently, decisions on appeal are, on average, issued more than two years after an appeal is docketed.

The USPTO will accord special status to an appeal pending before the Board under the following conditions: a certification and petition under 37 C.F.R. § 41.3 must be filed via EFS-Web; the petition must include a request for withdrawal in another application; both the appeal to be made special and the withdrawn appeal must have had a docketing notice mailed no later than June 19, 2015; the petition must be filed before the appeal to be withdrawn has been taken up for decision; there must be no request for oral hearing, or any request for oral hearing in the expedited appeal must be withdrawn; the appellant must agree not seek a refund of any appeal fees, including oral hearing fees; the appeal to be expedited and the appeal to be withdrawn must be owned by the same party as of June 19, 2015 or name at least one common inventor; and the petition must be signed by a registered practitioner who has power of attorney or has authority to act in both applications.

The USPTO has created a fillable PDF form, Form PTO/SB/438 for use in filing a certification and petition. The $400 fee for filing a petition under 37 C.F.R. § 41.3 is waived for a petition to make an appeal special. The pilot program is not available for making ex parte reexaminations special, as ex parte reexaminations are already handled with special dispatch.

Withdrawal of an appeal in which there are no allowed claims will result in abandonment of the application upon filing the withdrawal. Therefore, if an appellant wants to continue prosecuting such a withdrawn application, it must file a Request for Continued Examination (RCE) with a valid submission at the time of filing the petition.

The Expedited Patent Appeal Pilot will run until 2,000 appeals have been accorded special status or until June 20, 2016, whichever occurs earlier. The USPTO may optionally extend or discontinue the Pilot program depending on the results.

America Invents Act

AIA / CBM Review

The PTO Provides Additional Guidance for Meeting the "Financial Products or Services" Requirement for Instituting CBM Reviews

In a series of decisions addressing whether an abstract idea involves “financial product or service” in the context of covered business method (CBM) reviews, the Patent Trial and Appeal Board (PTAB or Board) found all of the challenged patents to be directed to financial products or services. PhotoShelter, Inc. and VectorStock Media Ltd. v. Uniloc USA, Inc. and Uniloc Luxembourg S.A., Case CBM2015-00023 (PTAB, May 21, 2015) (Tierney, APJ); Informatica Corp. v. Protegrity Corp., Case CBM2015-00010 (PTAB, May 11, 2015) (Petravick, APJ) (hereinafter Informatica I); Informatica Corp. v. Protegrity Corp., Case CBM2015-00021 (PTAB, June 1, 2015) (Turner, APJ) (hereinafter Informatica II).

In PhotoShelter, the petitioner sought a CBM review for a patent directed to a rights management system for storing, researching, buying and selling intellectual property rights. The parties disputed whether the patent was eligible for a CBM review.

The petitioner argued that the claims, which required visually presenting license terms and conducting a licensing transaction, were directed to financial activities. The patent owner asserted that the challenged claims were not directed to a product or service particular to a financial institution, such as a bank or insurance company, and that the presentation of information, such as a license term, did not require financial activity. However, the Board found that the patent owner interpreted the statute too narrowly, explaining that “the patent need not recite a specific financial product or service. Rather, the patent claims must only be broad enough to cover a financial product or service.” Here, the challenged claims are directed to buying and selling intellectual property rights, which is a financial activity for purpose of CBM review.

In Informatica I, the petitioner sought a CBM review for a patent directed to protecting data against unauthorized access. The petitioner argued that the claims covered a method for performing data processing, including protecting against unauthorized access of data, which is at least incidental to the practice, administration or management of a financial product or service. The patent owner argued that not a “single word in any single claim” is directed to a financial product of service, that none of the prior art cited by the petitioner were directed to a financial product or service and that the petitioner failed to cite any examples of financial products using the method of the claims.

The Board agreed with the petitioner, noting that the legislative history indicates that the words “financial product or service” should be interpreted broadly. Here, the Board found that the claimed data processing rules were described in the specification as used to protect against unauthorized access of a data portion in a database, and that banking (one of the examples in the specification) was a field where such protection was desired. Because banking is a financial activity, the Board held that the challenged claims involved the practice, administration or management of a financial product or service. In a related proceeding, the Board instituted a CBM review for the same arguments as stated above. (See Informatica II.)

In all three decisions (PhotoShelter, Informatica I and Informatica II), the patent owners argued that the claims of the patent were directed to “technological inventions” and therefore should be exempt from CBM review. But in all three cases the Board disagreed, finding that at least one claim of each patent failed to recite a technological feature that is novel or unobvious over the prior art. The Board also found that those claims do not solve a technical problem using a technical solution.

Practice Note: If a patent is directed to a financial transaction of almost any sort, it is likely the Board will find that the patent involves a “financial product or service” for purpose of a CBM review. The lesson to be drawn from these (and similar) decisions is that the Board has taken a broad view with respect to the “technological inventions” prong of the CBM test and, in close cases, will likely err on the side of instituting the CBM review. According to the recent statistics, of the 213 CBM proceedings in which the PTAB addressed these issues, 191 (90 percent) resulted in a finding that the challenged patent satisfied both the “financial product or services” prong and were not exempt from CBM review under the “technological invention” exception. Only six proceedings (2.8 percent) resulted in a finding that the challenged patent was directed to a technological invention (source: Docket Navigator).

AIA / CBM / Jurisdiction

CBM Review Threshold Met by the Intrinsic Record *Web Only*

Addressing threshold issues for instituting a covered business method (CBM) review, in two recent related cases, the Patent Trial and Appeal Board (PTAB or Board) found each of the two patent cases eligible for CBM review, concluding that the requirements under § 18 of the America Invents Act (AIA) had been met based on the record presented. Google Inc. et al. v. Priceplay.com, Inc., Case No. CBM2015-00024 (PTAB, May 18, 2015) (Giannetti, APJ.); Google Inc. et al. v. Priceplay.com, Inc., Case No. CBM2015-00025 (PTAB, May 18, 2015) (Giannetti, APJ).

Under AIA § 18(d)(1), a covered business method patent is “a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.” As part of the analysis, the Board considers “whether the claimed subject matter as a whole recites a technological feature that … solves a technical problem using a technical solution” to determine whether a patent is for a “technological invention” under the statute.

The two patents at issue in these decisions are directed to online sales transactions, specifically to online auctions where buyer participation in an intermediary activity affects the product purchase price in the online auction. The petitioner argued that the claims in both patents were directed to a sales transaction that was financial in nature and not directed to a technological invention. The Board agreed. In both cases, the Board concluded that the underlying patent met the requirements under the statute for purposes of instituting the CBM.

The Board concluded that the “financial product or service” requirement was met based on the available record. Important to the Board’s analysis was the patent specification and claims. In each case, the patent specification explicitly stated that “the present invention relates … to systems and methods wherein various forms of competition and/or entertainment are used to determine transaction prices between buyers and sellers.” The Board concluded that the claims in both patents confirmed the financial nature of the underlying invention, finding all of the claims directed to determining the sale price of a product at an auction (IP Update, Vol. 18, No. 4).

The Board determined that each case was not a patent for a technical solution to a technical problem, rejecting the patent owner’s argument that the patent claims were “unrelated to financial activities.” In each case, the Board dismissed the patent owner’s argument by reliance on the specification and claims. The Board explained that the patent specification characterized the invention as a business model, concluding that the patent claims as a whole failed to recite a technological feature. The Board found no convincing evidence from the patent owner to rebut the petitioner’s showing that the claimed subject matter as a whole was not directed to a technological invention.

The Board concluded that the petitioner would more likely than not prevail on its challenge based on 35 U.S.C. § 101. In both cases, the petitioner argued that the patent specification itself stated that the invention was directed “to a business model based on the abstract concept of price determination.” According to the patent owner, the claims were patent-eligible under § 101 for being directed to “a patent-eligible e-commerce concept and not a mathematical formula, fundamental truth, or [a] fundamental economic practice long prevalent in … commerce.” The Board disagreed, concluding that claims directed to similar e-commerce system have been held to be patent ineligible under § 101.

The patent owner also argued that the additional elements of the claims, when considered individually and as an ordered combination, greatly narrowed the abstract concept. The Board again disagreed that the narrowing claim limitations made on the record were sufficient to transform the abstract concept into patent-eligible subject matter, concluding that the patent owner’s analysis amounted to “stacking” of two abstract ideas. For these reasons, the Board found both patents eligible for CBM review.

AIA / CBM / Subject-Matter Eligibility

CBM that Recites Scanning Receipts, Encrypting the Data and Transmitting Not Patent-Eligible

Addressing the subject-matter eligibility of a business-method patent for scanning receipts, encrypting the data, and then transmitting it to a cloud server, the Patent Trial and Appeal Board (PTAB or Board) concluded that the patent was not directed to patent-eligible subject matter. As the Board explained, transferring encrypted data from one location to another was an abstract idea and implementing that abstract idea on generic computer components failed to provide meaningful limitations to the abstract idea. Fidelity Nat’l Info. Servs., Inc. v. DataTreasury Corp., CBM2014-00020 (PTAB, Apr. 29, 2015) (Tierney, APJ).

DataTreasury’s patent claimed a system for capturing electronic and paper transactions from various activities—including banking and consumer transactions—and then managing and storing that information. In particular, the claims recited scanning the documents using a scanner attached to a general purpose computer. The general purpose computer encrypted the data and then transmitted it to a cloud service to manage the data.

Applying the two-step analysis in Alice, the Board first determined that DataTreasury’s claims were directed to an abstract idea. In many cases, whether a patent claims an abstract idea depends on how the claims are characterized. Here, the PTAB characterized DataTreasury’s claims as “transferring [encrypted] information from one location to another.” Under this characterization, the claims were found to be directed to an abstract idea.

DataTreasury attempted to characterize the claims in a more tangible way, as directed to scanning or imaging of documents and receipts. Although scanning documents involves physical scanners and documents, the Board disagreed with the patent owner’s characterization of the invention and explained that the mere use of physical objects does not preclude a determination that the claims are directed to an abstract idea. Also, the Board rejected DataTreasury’s argument that its claims were not directed to abstract ideas because they were routine business practices. Rather the Board stated that simply because an idea is widely used does not preclude a determination that the practice is an abstract idea, as shown by the widely used ideas of risk hedging in Bilski and intermediated settlement in Alice.

DataTreasury also argued that the claimed encryption was not an abstract idea because numerous other patents related to encryption have issued. Relatedly, DataTreasury also relied on TQP, a 2014 U.S. District Court for the Eastern District of Texas opinion authored by Federal Circuit Judge Bryson (IP Update, Vol. 17, No. 3) in which the court denied a motion for summary judgment that a patent related to encryption was directed to patent-ineligible subject matter. The Board disagreed, explaining that encryption can be an abstract idea despite the fact that other patent eligible patents claimed encryption-related inventions. As the Board noted, those patents, although claiming the abstract idea of encryption, could be saved by the second step of the Alice analysis, under which the claims may be limited by an inventive concept that prevented them from pre-empting the abstract idea.

Applying the second step of the Alice analysis, the Board then determined that DataTreasury’s claims did not contain meaningful limitations beyond the abstract idea. Although the claims recited specific structural components—subsystems in various locations that transmitted data between themselves—these components were merely conventional objects grafted onto an underlying abstract idea. DataTreasury itself admitted that the claims did not require specialized components and could instead be implemented on generic hardware. The Board also concluded that the invention did not satisfy the machine-or-transformation test because the claims did not recite a transformed article. Instead, the claims merely taught duplicating financial data and then transferring that data. Thus, the Board concluded that DataTreasury’s claims were directed to patent-ineligible subject matter.


PTAB Issues Dissent for Requested Adverse Judgment

In a case with more twists that a Game of Thrones plot, an unexpected dissent issued from an order of the Patent Trial and Appeal Board (PTAB or Board) granting the patent owner’s requested cancellation of the challenged claims and terminating of the inter partes review (IPR). Target Corp. v. Destination Maternity Corp., Case IPR2014-00508 (PTAB, May 8, 2015) (Green, APJ) (Fitzpatrick, APJ, dissenting-in-part).

The procedural backdrop of this case is that after filing an initial IPR petition in 2013, Target filed a second IPR petition after the one-year bar under 35 U.S.C. § 315(b) had run, based on the filing of an infringement action by Destination Maternity in 2012. The second petition, however, was filed within one month of the Board’s institution of the first IPR proceeding and was accompanied by a Motion for Joinder with that earlier proceeding. In response to the Board’s concern with timing and potential effect on the existing schedule, the petitioner filed a Motion to Limit the Petition to simplify the issues presented and thereby facilitate joinder and minimize the burden on the patent owner. The petitioner’s new grounds focused on a foreign publication, which the petitioner contended was known to the patent owner but was uncovered by petitioner after the first IPR petition was filed and after the one-year bar of § 315(b) had run, because it had been withheld by the patent owner in the underlying litigation until a month after the first IPR petition was filed.

In initially denying joinder, the majority (of an expanded panel of five judges) construed the controlling statute, as preventing joinder, reasoning that because Target was already a party to the earlier-filed IPR proceeding, it could not be joined to that proceeding. The denial of joinder resulted in dismissal of the second petition as time-barred.

However, a twice-expanded panel, now seven judges, granted the petitioner’s rehearing request, stating that the initial denial of joinder was based on an “erroneously narrow interpretation” of the joinder statute. According to the majority, the joinder statute allows the director to join “any person who properly files a petition under § 311 [i.e., the statue authorizing inter partes review].” Since § 311 only excludes the patent owner from filing an IPR petition, the majority reasoned that Congress had only excluded the patent owner and not a petitioner in an already instituted review proceeding.

The dissent in the decision on institution, joinder and rehearing—which constituted the members of the original three-member panel—argued that majority’s decision essentially rewrote two subsections of § 315; read past the most relevant provision of the Congressional Final Committee Report of the America Invents Act; misinterpreted an “ambiguous” Congressional statement by Senator Kyl; relied on non-binding prior Board decisions; and relied on the Board’s rules and the Office Patent Trial and Practice Guide instead of the binding federal statute. The dissent further argued that the majority read § 315(c) as if it granted discretion for the Board to act in any way not expressly prohibited by the statute, rather than only in ways that are stated expressly in the statute.

Practice Note: While the expanded panel of the Board has seemingly resolved the joinder issue in this case, the stage may have been set for the Federal Circuit to weigh in on the statutory interpretation issue.

AIA / IPR Practice

Decision to Expand Panels Resides with PTAB, Not Parties

In two recent decisions by the Patent Trial and Appeal Board (PTAB or Board), the Board denied petitioner requests for rehearing by an expanded panel under 37 C.F.R. § 42.71(c). Conopco, Inc. dba Unilever v. Procter & Gamble, Case No. IPR2014-00506 (PTAB, Dec. 10, 2014) (Obermann, APJ); AOL v. Coho Licensing LLC, Case No. IPR2014-00771 (Mar. 24, 2015) (Quinn, APJ).

Unilever v. Procter & Gamble

Prior to its request for rehearing, the petitioner had filed two separate petitions for inter partes review. The Board denied both petitions, noting in its second denial that the petitioner had raised “substantially the same prior art or argument” that was “previously presented” in the first petition. The petitioner’s request for rehearing asserted, inter alia, that “the Board (1) lacked the statutory authority to deny the second petition . . . and (3) had erroneously precluded a second petition that raised improved, new prior art and arguments.” The petitioner also requested a rehearing before a panel expanded to include the chief judge.

The petitioner argued that neither the statutory framework nor rules governing inter partes review indicates that a petitioner is barred from filing a “second, follow-on petition” that corrects deficiencies in the first petition. The Board rejected the petitioner’s argument, noting that the Board did not hold that a petitioner was barred from filing a second, follow-on petition. Rather, the Board assessed the facts of the petitioner’s second petition and exercised its discretion (as authorized by statute) to deny institution. The Board noted that Congress provided that the director, and by extension the Board, “may, but not must, institute a proceeding,” even when a petitioner establishes a reasonable likelihood of prevailing with respect to at least one challenged claim. The Board thus emphasized that it maintains the authority to exercise its institution discretion in any decision.

The Board also rejected the petitioner’s argument that its second petition raised new prior art and arguments, concluding that the art and arguments in the second petition were “substantially the same” as those in the first.

Turning to the petitioner’s request for an expanded panel, and its contention that a standard operating procedure (SOP) contemplated expanded panels in cases of ex parte appeals and interferences, explained that the SOP simply stated that the Board may expand a panel “on a suggestion from a judge or panel,” but did not create any “legally enforceable rights” in the petitioner. The Board therefore rejected the request for an expanded panel.

AOL v. Coho Licensing LLC

The Board also rejected a request for rehearing by an expanded panel in its AOL decision. Once again, the Board emphasized that a panel may be expanded “on a ‘suggestion’ from a judge or panel” but that parties “are not permitted to request, and panels do not authorize, panel expansion.”

In its petition for rehearing, the petitioner cited to a dissent in the denial of institution as evidence of the need for an expanded panel. The Board rejected the argument, stating that a dissent “shows neither an abuse of discretion nor a conflict that weighs in favor of panel expansion.” The Board also took note of the petitioner’s introduction of new facts and arguments in its request for rehearing, declaring that the Board cannot consider facts not before it and thus did not abuse its discretion in denying institution.

Practice Note: Though these Board decisions were not designated as “informative,” and thus not binding on future panels, it appears unlikely that the Board will entertain parties’ requests for expanded panels in inter partes review proceedings and that presentation of such a request risks antagonizing the Board.

AIA / IPR / Supplemental Evidence

Submission of Supplemental Evidence in an IPR May Be Submitted After the Due Date *Web Only*

Addressing the circumstances for submitting supplemental evidence in an inter partes review (IPR), the Patent Trial and Appeal Board (PTAB or Board) allowed the petitioner to submit a responsive declaration after the due date for such submissions where the declaration was relevant, the evidence could not be obtained without a subpoena and the patent owner was not prejudiced. International Business Machines Corp. v. Intellectual Ventures I LLC, IPR2014-01385 (PTAB, May 4, 2015) (Parvis, APJ.).

The petitioner, IBM, filed an IPR against a patent belonging to Intellectual Ventures I (the patent owner). The prior art included a reference called “Oracle 8i Application Developer’s Guide—XML,” which listed a date of “September 2000” on the first page. The petitioner alleged that this Oracle Developer’s Guide was a printed publication dated September 2000. The patent owner countered that the Oracle Developer’s Guide had not been shown to be a printed publication or authenticated and was inadmissible hearsay.

To respond to the patent owner’s allegations, IBM was authorized to subpoena the Oracle Corporation regarding its Oracle Developer’s Guide. In response, Oracle provided a declaration (the “Oracle Declaration”) to IBM before the Board’s due date for filing supplemental evidence. IBM requested permission to file the Oracle Declaration as supplemental evidence after the due date. The patent owner opposed this request, claiming that it was prejudiced by being served supplemental evidence after the due date and that it lacked sufficient time to formulate a strategy for responding.

Unpersuaded by the patent owner’s position, the Board found that the information in the Oracle Declaration was relevant and could not be obtained without the subpoena. According to the Board, allowing the petitioner to submit the Oracle Declaration is in the interest of justice because the Oracle Declaration responds to an objection by the patent owner regarding public availability of the Oracle Developer’s Guide and thus its status as prior art. The Board also concluded that the patent owner was not prejudiced because IBM had previously agreed to an extension of the deadline for the patent owner’s response and, if the patent owner still believed that the Oracle Developer’s Guide was inadmissible, the patent owner could file a motion to exclude.

Following the Board’s decision, the patent owner requested authorization to cross-examine Mr. Reader, the Oracle employee responsible for preparing the Oracle Declaration. The Board granted the patent owner’s request, subject to Oracle’s agreement, but limited the scope of cross-examination to only the subject matter of Mr. Reader’s narrow direct testimony. The Board also requested that the patent owner place as little burden on Oracle Corporation as possible, suggesting that the cross-examination be limited to one hour and be done by telephone or in writing. As the Board explained, any request for cross-examination by the patent owner that is not narrowly tailored will be denied because the patent owner had not provided any persuasive evidence or reasoning to doubt the “September 2000” date on the Oracle Developer’s Guide, and the Board was not going to authorize “an unnecessary fishing expedition.”

AIA / CBM / Institution

Substantially the Same Prior Art: Square Inc. v. Protegrity Corp. *Web Only*

Addressing the issue of what constitutes the “same or substantially the same” prior art or arguments, the Patent Trial and Appeal Board (PTAB or Board) chose not to exercise its discretion to deny two separate covered business method (CBM) petitions. Square Inc. v. Protegrity Corp., Case No. CBM2015-00014 (PTAB, May 4, 2015) (Turner, ALJ); Actifio Inc. v. Delphix Corp., Case No. CBM2015-00100 (PTAB, May 14, 2015) (Scanlon, ALJ).

The petitioners in both proceedings argued that the Board should exercise its discretion under 35 U.S.C. § 325(d) and decline to institute the proceedings because “the same or substantially the same prior art or arguments previously were presented to the Office.” The petitioners relied on the fact that the prior art references were considered during prosecution, during reexamination, and/or during a previous covered business method patent review. The Board was not persuaded.

In Actifio Inc. v. Delphix Corp., the Board noted that the materials previously presented to the U.S. Patent and Trademark Office regarding the prior art system were only brochures, which lacked the level of detail presented in the CBM petition and the incorporated references. Separately, in Square Inc. v. Protegrity Corp., the Board found that arguments during a previous CBM review would not be considered as the same or substantially the same because that previous proceeding settled before the Board issued a final ruling. In addition, the Board found that the petitioner raised different arguments with respect to the patents and articles than those presented during the prosecution and reexamination of the subject patent. For these reasons, the Board found both patents eligible for CBM review.

Practice Note: While the Board has shown a willingness to deny petitions that raise the same or substantially the arguments in a CBM or inter partes review (IPR) proceeding, the Board appears more reluctant to deny a petition based on allegations that the same or substantially the same prior art is asserted. See Conopco Inc. dba Unilever, v. The Procter & Gamble Company (IP Update, Vol. 18, No. 4).

AIA / Rules

New Amendments to USPTO Post-Grant Regulations

On May 19, 2015, the United States Patent and Trademark Office (USPTO) issued a final rule amending its regulations that apply to post-grant proceedings. These new rules deal with ministerial changes such as increasing page limits and making the regulations reflect the current practices used by the Patent Trial and Appeal Board (PTAB). A second set of rule changes—to be issued later this year—will be more substantive and issued in proposed form first with an opportunity for public comment. We will issue an On the Subject when the second set of rules is issued, and we will be happy to assist with the submission of any comments. Below is a brief overview of the major provisions of this first amendment to the regulations.

  • Motions to Amend. The page limit for motions to amend, and oppositions to motions to amend, is increased from 15 pages to 25 pages. The required claim listing may now be made in an appendix accompanying the motion to amend, and the appendix is not counted toward the 25-page limit.
  • Petitioner’s Reply Brief. The page limit for the petitioner’s reply to patent owner’s response after institution is increased from 15 pages to 25 pages.
  • Font Style. All filings must be in 14-point, Times New Roman proportional font.
  • Back-Up Counsel. The rules are modified to make it clear that there can be more than one back-up counsel. There may be only one lead counsel.
  • Fees. The rules clarify that you must include in the number of claims in the petition when calculating the required fees each challenged claim as well as any claim from which a challenged claim depends, unless that claim is separately challenged. The USPTO explains that the claims from which the dependent claim depends must be construed along with the dependent claim.
  • Right to Depose. The rules make clear that routine or automatic discovery only includes affidavit testimony prepared for the post-grant proceeding. Consequently, if an affidavit is submitted from a district court proceeding, a motion must be filed to depose that affiant.
  • Objections to Evidence. The rule makes it clear that objections to evidence must be filed with the PTAB and served on opposing counsel.
  • Covered Business Method Proceedings. The rule explicitly provides that a covered business method proceeding may not be instituted where the petitioner filed a civil action challenging the validity of a claim of the patent before filing the petition. The change was made to track the statute.


Trademarks / Lanham Act / Attorney Fees

No Attorneys' Fee Award Based on Dismissed Counterclaim

In an appeal between two parties to a contract for marketing and selling defendant’s accounting practices in various states, the U.S. Court of Appeals for the Seventh Circuit addressed whether the defendant breached the contract by terminating plaintiff and whether the district court abused its discretion by denying attorneys’ fees for defendant’s counterclaim. On the first issue, the 7th Circuit reversed the district court’s breach of contract analysis, granting summary judgment in favor of defendant, but affirmed the district court’s denial of attorneys’ fees under 15 U.S.C. § 1117(a) of the Lanham Act. Burford v. Accounting Practice Sales, Inc., Case No. 14-2692 (7th Cir., May 13, 2015) (Hamilton, J.).

William J. Burford sued former employer APS in Illinois state court for breach of contract after APS terminated him. APS removed to federal court and argued throughout the district court proceedings that there was no breach because the agreement allowed APS to terminate at will. Once the case was in federal court, APS also counterclaimed for misappropriation of its trade name because, after Burford was terminated, he started a rival business named “American Accounting Practice Sales.” The district court agreed with APS on its contract theory and determined as a matter of law that the contract with Burford was of indefinite duration and was therefore terminable at will. The grant of summary judgment on the contract claim came shortly before trial. Rather than prosecute its Lanham Act counterclaim, APS voluntarily dismissed its counterclaim with prejudice, mooting the need to proceed to trial. Burford, the prevailing party on the allegations of trade name misappropriation, then filed a post-judgment motion for attorneys’ fees under 15 U.S.C. § 1117(a). The district court denied the request for attorneys’ fees because the evidence and procedural history did not suggest that APS’s counterclaim amounted to an abuse of the litigation process. Burford appealed.

On the contract issue, the 7th Circuit agreed with the district court that the contract was of indefinite duration because it automatically renewed, but disagreed that the indefinite duration necessarily makes it terminable at will. Here, the contract as to Burford was terminable only for cause or upon the occurrence of a specific event. The contract was therefore terminable at-will by Burford, the employee, but was not terminable at-will by APS, the employer. The 7th Circuit concluded that APS could only terminate in the event of breach by Burford. The circuit court further explained that adoption of the theory under which the district court granted summary judgment threatened to deprive Burford of the economic basis for the bargain.

Turning to whether APS’s Lanham Act counterclaim was “exceptional” under the statute, the 7th Circuit explained that in order to show the counterclaim allegations were exceptional, Burford was required to demonstrate “an abuse of process.” Such an abuse could be established if the claim was “objectively unreasonable” because “a rational litigant would pursue it only because it would impose disproportionate costs on his opponent.” Applying the abuse of discretion review standard, the 7th Circuit affirmed the reasoning of the trial court. First, the court noted there no definitive link between the merits of APS’s claim and the voluntarily dismissal (even if it was on the eve of trial). As the court explained, APS sought dismissal after it won summary judgment on Burford’s claim, and it was rational in walking away at that point “without further expense or effort.” A party is entitled to pursue a reasonable claim if it thought it had to be in court regardless, but need not pursue the counterclaim as a stand-alone effort after the opponent’s claim falls away. Second, the court agreed that APS supported its allegations with evidence during summary judgment such that it was not frivolous. The 7th Circuit noted in dicta that it was skeptical as to whether APS’s mark was protectable, but it declined to decide the ultimate merits of the claim.

Trademarks / Generic Marks

Two Generics Can Make a Mark

The U. S. Court of Appeals for the Federal Circuit vacated and remanded for further proceedings the decision of the Trademark Trial and Appeal Board (TTAB or Board) cancelling the registration of the mark PRETZEL CRISPS, finding the Board applied the wrong legal standard for genericness. Princeton Vanguard, LLC v. Frito-Lay North America, Inc., Case No. 14-1517 (Fed. Cir., May 15, 2015) (O’Malley, J.).

A party opposing an application for mark or petitioning to cancel a mark bears the burden of proving genericness by a preponderance of evidence. Frito-Lay opposed Princeton Vanguard’s application to register PRETZEL CRISP, arguing that the term is generic for pretzel crackers. The Board sustained Frito-Lay’s opposition and granted its petition for cancellation. According to the Board, if a mark is compound, then the 1987 Gould Paper case applies, allowing it to analyze the terms individually. If on the other hand, the mark is a phrase, then the 1999 American Fertility cases applied, requiring the Board to consider the mark in its entirety. The Board found that the term “pretzel crisp” was a compound term, not a phrase, thereby permitting it to consider the terms individually under Gould. In doing so, the Board determined that “pretzel” was generic for pretzels and pretzel snacks, while “crisp” was generic for crackers leading to the conclusion that “pretzel crisp” was generic for “pretzel crackers.” Princeton Vanguard appealed.

The Federal Circuit clarified that there is only one legal standard for genericness: the two-part test set forth in the 1986 Marvin Ginn case. Under this test, in order to determine whether a mark is generic, the Board must identify the genus of goods or services at issue and then assess whether the public understands the mark, as a whole, to refer to that genus. The test is the same regardless of whether the mark is a compound term or a phrase. The Federal Circuit had previously explained that even if each of the constituent words in a combination mark is generic, the combination is not generic unless the entire formulation does not add any meaning to the otherwise generic mark.

Applying its president to this case, the Federal Circuit noted that since the record was replete with evidence of the public’s perception of the term PRETZEL CRISP as a whole, it was unclear why the Board would resort to analyzing the terms individually. Although the Board claimed it would have reached the same conclusion had it analyzed the term as a phrase, the Court found no indication that the Board actually conducted such an analysis.

Rather, as the Court noted, although the record contained evidence, including declarations, survey evidence and evidence of use of the mark PRETZEL CRISP in the snack food industry, the Board gave “controlling weight” to the dictionary definitions, selective evidence of use by the public and evidence of use by Frito-Lay itself. For example, the Court observed that the Board improperly focused on evidence of the word “crisp” in isolation and considered a few selected examples of “pretzel crisp.” Further, despite finding no flaws in the two genericness surveys submitted by the parties, the Board disregarded the results of survey evidence without explanation. Finally, in the Federal Circuit’s view the Board took a “short cut,” ignoring evidence that might have compelled a contrary conclusion. On remand, the Court instructed the Board to apply the appropriate legal standard, consider all of the evidence, and give appropriate consideration to the proffered survey evidence.

Practice Note: Regardless of whether a mark is a compound term or a phrase, there is only one legal standard for determining whether a mark is generic, and it is a two-part inquiry. But the critical issue is whether members of the relevant public primarily use or understand the term sought to be protected to refer to the genus or class of goods or services in question.

Trademarks / Contempt

No Clear Notice, No Contempt *Web Only*

In the latest episode of a 30-year dispute over the use of marks depicting mounted polo players, the U.S. Court of Appeals for the Second Circuit vacated the district court’s order finding contempt of a 2012 injunction. U.S. Polo Ass’n, Inc. v. PRL USA Holdings, Inc., Case Nos. 13-1038, -1130 (2d Cir., May 13, 2015) (Winter, C.J.).

The U.S. Polo Association (USPA) is the national governing body for the sport of polo, but it also sells branded apparel, accessories and other products. The appellees (collectively PRL) own the Polo Ralph Lauren marks, including the famous logo depicting a single mounted polo player with a raised mallet.

The first case between the parties ended in 1984 and resulted in PRL’s victory and a broad injunction barring the USPA from using any mark “confusingly similar” to the PRL marks in connection with any goods or services. In 1996, the USPA began using the Double Horsemen Mark, depicting two mounted polo players, in connection with apparel, leather goods and watches. A jury found that this use was not infringing. Several years later, the USPA started using the Double Horsemen Mark on fragrance products, and this time, PRL brought suit and won. The district court enjoined the USPA both from using the Double Horsemen Mark in connection with fragrance or cosmetic products and—borrowing the language of the 1984 injunction—from using the PRL marks or any “confusingly similar” marks in any market.

After learning that the USPA had been using the Double Horseman Mark on sunglasses, PRL moved for an order of contempt. The district court found the USPA in contempt, as PRL had clearly and convincingly established that the mark was “confusingly similar” to PRL’s logo. The court declined to consider the specifics of the eyewear market in assessing infringement, finding that the second injunction applied to all markets. USPA appealed.

The 2d Circuit disagreed with the district court, emphasizing the “critical fact” that a jury had found the contested mark non-infringing when used on apparel, leather goods and watches, which established that the mark may be infringing in some markets but not infringing in others. Therefore, the district court should have assessed confusing similarity on a market-by-market basis. Here, the district court had erroneously relied on the 2d Circuit’s Wella decision to conclude otherwise. In Wella, the 2d Circuit had determined the market-by-market analysis was inappropriate because there was no doubt that the mark at issue was infringing and that the injunction covered all markets.

The Court also noted that a finding of contempt requires more than a finding of infringement. For a contempt order to issue, an enjoined party must be on clear notice that its conduct violates the injunction and there must be clear and convincing evidence that the mark in use is confusingly similar to or otherwise infringes the protected marks. Because the record did not support either finding, the Court vacated the contempt order and remanded for further proceedings.


Copyrights / Preliminary Injunction

Copyrights / Royalties

Music Streaming Rights are Included in ASCAP's Licenses

The U. S. Court of Appeals for the Second Circuit affirmed a district court ruling that composers and music publishers cannot partially withdraw from the American Society of Composers, Authors and Publishers (ASCAP) licensing scheme to attempt to negotiate or coerce direct deals with new media companies. The 2d Circuit also affirmed the royalty rate found by the district court. American Society of Composers, Authors and Publishers et al. v. Pandora Media Inc., Case Nos. 14-1158, -1161, -1246. (2d Cir., May 6, 2015) (Leval, J.; Straub, J.; Droney, J.) (per curiam).

ASCAP is a performing rights organization that represents almost half of all composers and music publishers in the United States. The composers represented granted ASCAP a non-exclusive right to license public performances of their music. ASCAP is subject to a consent decree because of concerns that ASCAP’s size grants it monopoly power in the performance rights market. According to the consent decree, ASCAP must grant any music user making a written request a non-exclusive license to perform all of the works in the ASCAP repertory. The definition of “ASCAP repertory” in the consent decree is “those works the right of public performance of which ASCAP has or hereafter shall have the right to license at the relevant point of time.” The “right of public performance” is defined as “the right to perform a work publicly in a nondramatic manner.”

In 2010, some ASCAP members became concerned that ASCAP was receiving below-market rates for public performance licenses to new media companies such as Pandora. The members wanted to withdraw from ASCAP the right to license their works to new media users and instead negotiate with new media users outside of the ASCAP framework. ASCAP changed its rules accordingly to permit this practice. Shortly thereafter, Sony, EMI and Universal withdrew their new media licensing rights from ASCAP and entered into a direct license with Pandora. Pandora terminated its existing ASCAP license and requested a new license for the period running from January 1, 2011 to December 31, 2015.

Pandora filed a rate court petition in 2012. In 2013 Pandora moved for summary judgement on the issue of the partial withdrawals. The district court granted Pandora’s motion and set the rate for all five years to 1.85 percent. ASCAP, Sony, EMI and Universal each appealed.

The U. S. Court of Appeals for the 2d Circuit affirmed the district court’s ruling holding that the plain language of the consent decree precluded ASCAP from accepting partial withdrawals. The circuit court explained that the “decree’s definition of “ASCAP repertory” and other provisions of the decree establish that ASCAP has essentially equivalent rights across all of the works licensed to it.” The circuit court further stated that “as ASCAP is required to license its entire repertory to all eligible users, publishers may not license works to ASCAP for licensing to some eligible users but not others.” The 2d Circuit also affirmed the district court’s determination that the proper rate for Pandora’s license was 1.85 percent.

Copyrights / Royalties

Portion of California Resale Royalty Act Struck Down as Unconstitutional *Web Only*

Addressing the constitutionality of California’s Resale Royalty Act, Cal. Civ. Code § 986 (“the Act”), the U.S. Court of Appeals for the Ninth Circuit held that a portion of the Act violated the dormant Commerce Clause of the U.S. Constitution. The Court remanded for further proceedings. Sam Francis Found. v. Christie’s, Inc., Case Nos. 12-56067, -56068, -56077 (9th Cir., May 5, 2015) (Graber, J.) (Berzon, J., concurring) (Reinhardt, J., concurring-in-part and dissenting-in-part).

The Act generally required that “[w]henever a work of fine art is sold and the seller resides in California or the sale takes place in California, the seller or the seller’s agent shall pay to the artist of such work of fine art or to such artist’s agent 5 percent of the amount of such sale.” The plaintiffs brought three class actions against defendants Sotheby’s, Christie’s and eBay, claiming that the defendants failed to comply with their obligations under the Act. The defendants moved to dismiss the case arguing, among other things, that the Act violated the dormant Commerce Clause, which prohibits a state from regulating commerce that takes place wholly outside of that state. The district court agreed and granted the defendants’ motions to dismiss, holding that the Act’s regulation of sales outside of California was an impermissible regulation of out-of-state conduct. The district court further held that the offensive provision could not be severed from the rest of the Act, thus rendering the entire Act unconstitutional.

On appeal, the 9th Circuit agreed in part with the district court and held that the Act’s regulation of sales outside of California, even if made by California residents, violated the dormant Commerce Clause. As the 9th Circuit explained, the “Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State.” Here, the state statute facially regulates a commercial transaction that “takes place wholly outside of the State’s borders.” Accordingly, it violates the dormant Commerce Clause. The 9th Circuit, however, explained that the offending provision could be severed from the Act, meaning that the Act’s royalty requirement for art sales taking place in California stands. The 9th Circuit remanded the case for consideration of the plaintiffs’ other arguments.

In her concurring opinion, Judge Berzon agreed that the Act was unconstitutional as applied to out-of-state art sales conducted by out-of-state agents, but argued that the majority opinion went too far in holding that the Act was unconstitutional as applied to out-of-state art sales conducted by California residents, as no plaintiff was a California resident.

In his dissenting opinion, Judge Reinhardt chided the majority for “not only deciding an unnecessary, highly disputable question regarding California art owners, but . . . decid[ing] it incorrectly.” In Judge Reinhardt’s view, the Act, as applied to sellers of art that reside in California, did not violate the dormant Commerce Clause as the Act dealt with income received by California art owners. Judge Reinhardt concluded his dissent with a call to the Supreme Court to revisit its dormant Commerce Clause jurisprudence, as it is “unfortunate that [it]. . . has compelled [courts] to invalidate the extraterritorial application of such innocuous and beneficial state laws.”

Practice Note: This decision comes less than one month after the introduction of the American Royalties Too (ART) Act of 2015 (H.R. 1881) in the U.S. House of Representatives, which would require an art seller to pay the artist a royalty of the lesser of either 5 percent of the purchase price or $35,000 and would establish a federal copyright infringement offense for failure to pay such a royalty. This bill could become law prior to a final decision in the remand proceedings in this case.