IP Update, Vol. 19, No. 6

Patents

PATENTS / WILLFULNESS

The New Willfulness Paradigm


The Supreme Court of the United States traced two centuries of analysis related to enhanced damages in patent cases to conclude that the US Court of Appeals for the Federal Circuit’s two-part test, announced nearly a decade ago in In re Seagate, was unduly rigid and impermissibly constrained a district court’s discretion. Halo Electronics, Inc. v. Pulse Electronics, Inc., et al., Case No. 14-1513 (June 13, 2016) (Roberts, CJ); Stryker Corp. v. Zimmer, Inc., Case No. 14-1520 (June 13, 2016) (Roberts, CJ). Because the pertinent language of 35 USC § 284 contains no explicit limit on when enhanced damages are appropriate for willful infringement, going forward it will be for district courts to determine, based on the particular circumstances of each case, whether an infringing party’s conduct is sufficiently egregious to award enhanced damages.

Background

Both cases before the Supreme Court were decided under the Seagate framework at the Federal Circuit. In both instances, the petitioner proved infringement of a valid patent but was ultimately denied enhanced damages. In the appeal between Halo Electronics and Pulse Electronics, the district court declined to award enhanced damages, and the Federal Circuit affirmed. In the appeal between Stryker and Zimmer, the district court trebled the amount of damages, but the Federal Circuit set aside the enhanced damages award based on a de novo determination that the defendant’s defenses at trial were objectively reasonable. The Supreme Court granted certiorari in both cases to assess whether the two-part Seagate framework was consistent with § 284 (IP Update, Vol. 18, No. 10).

The Unanimous Supreme Court Opinion

Since 2007, the Federal Circuit and the district courts have applied a two-part test to establish whether infringement of a patent was willful, evaluating (1) whether the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent, and (2) whether the risk of infringement was either known or so obvious that it should have been known to the accused infringer.

Beginning with the plain language of the statute, the Supreme Court found no limit or condition in § 284 that supported the test the Federal Circuit had adopted. Rather, the Supreme Court focused on the word “may” and its connotation of discretion. The Supreme Court declined to impose a “precise rule or formula” on district courts considering enhanced damages, but instructed that a district court’s discretion should be exercised on a case-by-case basis.

The opinion went on to explain that in a typical patent infringement case, enhanced damages are not appropriate. Rather, such an award is to be reserved for conduct that is “characteristic of a pirate” or “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant.” In essence, a district court’s aim in enhancing damages is to fashion a punitive sanction for egregious infringement behavior. The degree of culpability, however, should be measured at the time of the challenged conduct.

The Supreme Court’s reasoning relied heavily on its earlier interpretation of 35 USC § 285 (awarding attorneys’ fees for an exceptional case) in Octane Fitness, LLC v. ICON Health & Fitness, Inc. (IP Update, Vol. 17, No. 5). As it did in Octane Fitness, the Supreme Court rejected the clear and convincing evidence standard, explaining that willful infringement need only be shown by a preponderance of the evidence. Likewise, because enhanced damages (such as an award of attorneys’ fees) are subject to a district court’s discretion, going forward an award of enhanced damages will be reviewed on appeal for an abuse of discretion.

While respondents raised concerns regarding the interplay of unlimited discretion to award treble damages and the leverage of patent holders to exact outsized licensing fees, the Supreme Court cautioned district courts to strike a balance. District courts need not award enhanced damages in “garden variety cases,” but the need for strong patent protection to promote innovation justifies a looser construct than the Seagate framework.

The Concurrence

In concurrence, Justice Breyer set forth his own understanding of the Court’s opinion. He was joined by Justices Kennedy and Alito. The concurrence emphasized that willful misconduct is not a situation where the infringer knew about the asserted patent and nothing more. Because of the punitive nature of enhanced damages, the evidence must demonstrate a difference between knowledge of a patent and intentional infringement.

Practice Note: In the wake of the Supreme Court’s decisions in Halo- Stryker, it remanded two patent cases in which cert was pending back to the Federal Circuit for reconsideration in view of Halo. The cases are Innovention Toys, LLC v. MGA Entertainment, et al., Case No. 15-635 and WesternGeco LLC v. ION Geophysical Corporation, Case No. 15-1085.


PATENTS / PATENT ELIGIBILITY / CBM

Evolving Patent Eligibility Standard for Computer-Implemented Inventions


David Mlaver

Addressing the patent eligibility of computer-implemented inventions, the US Court of Appeals for the Federal Circuit concluded that under step one of the Alice eligibility test, claims directed to improvements in computer functionality may not be directed to abstract ideas if the invention is directed to an improvement in the operation of a computer itself. Enfish, LLC v. Microsoft Corp., Case No. 15-1244 (Fed. Cir., May 12, 2016) (Hughes, J). Less than one week later, the Federal Circuit found that a computer-implemented invention that requires a computer to facilitate what might otherwise be non-computerized functions was directed to an abstract idea and therefore not patent eligible under Alice step 1. In re TLI Comm’s LLC Pat. Lit., Case Nos. 15-1372; -1376; -1377; -1378; -1379; -1382; -1383; -1384; -1385; -1417; -1419; -1421 (Fed. Cir., May 17, 2016) (Hughes, J). Shortly thereafter, the Patent Trial and Appeal Board (PTAB or Board) applied Enfish to find that claims directed to an improvement to computer functionality were not likely patent ineligible at Alice step 1. Ahold USA Inc. v. Advanced Marketing Systems, LLC, Case No. CBM2016-00013, Paper 6 (May 26, 2016) (Giannetti, APJ).

In Enfish, the Federal Circuit reversed the district court judgment of no patent eligibility, finding claims to a computerized database organized as a “self-referential” logical table that defines its columns by rows in the same table to be directed to patent eligible subject matter. The Federal Circuit explained that a self-referential database allows for faster searching, easier configuration and more effective data storage than prior art databases. The Court reasoned that the claims were directed to a non-abstract improvement in computer function as opposed to the abstract idea of “storing, organizing, and retrieving memory in a logical table.”

By contrast, in TLI, the Federal Circuit (again with Judge Hughes writing) affirmed the unpatentability of claims to a computer-implemented method of organizing and storing digital information such as photographs using classification information such as the photograph’s date or location. The Court found that, rather than improving the function of a computer, the claimed method merely used the computer to facilitate the performance of an age-old method of indexing documents. Thus, the Court found the claims to be directed to the abstract idea of organizing information, and patent-ineligible because the remaining limitations amounted to no more than a command to “apply it on a [computerized] telephone network.”

Less than two weeks later, the PTAB, applying Enfish in the Ahold covered business method (CBM) proceeding, declined to institute a CBM review of claims that it held were directed to an improvement in computer functionality (but not based on grounds of patent eligibility). The claims at issue were directed to a computer-implemented coupon system that allows vendors to imbue one coupon with multiple discounts, then selectively deactivate each discount as a consumer purchases each discounted item. Analyzing the CBM-eligibility of the claims, the PTAB explained the claims were not directed to a “technological invention” because the focus of the specification was the claimed coupon as opposed to the claimed data processing components, which were “conventional” and “existing.” The PTAB was not convinced that the problem solved by the claimed invention specifically arose in the realm of computer networks, but nonetheless found that the petitioner had insufficiently demonstrated the likelihood that the claims were not patent eligible. The PTAB faulted the petitioner for analyzing only whether the coupon was abstract rather than the combination of the coupon and data-processing components. Analyzing the claim as a whole, the PTAB reasoned that the claims were directed to improvements in computer function, not the abstract idea of “offering, tracking and processing discounts.” However, the PTAB went on to institute CBM review on written description and anticipation grounds.

Practice Note: The US Patent and Trademark Office has already promulgated guidance to examiners applying Enfish to narrow the circumstances under which claims to computer-implemented inventions will be rejected for patent ineligibility.


PATENTS / OBVIOUSNESS / IPR

Federal Circuit Distinguishes “Motivation to Combine” from “Expectation of Success” for Obviousness Purposes


Addressing issues of obviousness and the proper scope of inter partes review (IPR) reply briefs, the US Court of Appeals for the Federal Circuit upheld a Patent Trial and Appeal Board (PTAB or Board) IPR decision finding the patent at issue valid. Intelligent Bio-systems Inc. v. Illumina Cambridge LTD, Case No. 15-1693 (Fed. Cir., May 9, 2016) (O’Malley, J).

Intelligent Bio-Systems (IBS) filed an IPR challenging the claims in Illumina Cambridge’s patent for a DNA sequencing method as obvious. The patent involved nucleotides, the building blocks of DNA strands, that have been modified with a removable azido “protecting group” that prevents each nucleotide from binding to the next nucleotide in the strand until it is removed (deblocked). IBS argued that prior art taught a method of DNA sequencing using nucleotides with protecting groups and that other prior art taught the use of azido groups. Illumina responded that, in the prior art, successful sequencing required 100 percent deblocking, while the disclosed azido groups achieved less than 80 percent removal. The PTAB found that the lower deblocking efficacy disclosed in the prior art eliminated any expectation of success or motivation to combine the prior art. IBS appealed.

On appeal, the Federal Circuit found that the PTAB erred by basing its standard for success on the prior art rather than the claims of the patent. Although the prior art considered 100 percent removal necessary for success, the claims in question did not include that limitation. Therefore IBS did not have to prove that such a result would be reasonably expected. However, the Court agreed that 100 percent deblocking was relevant to whether one of ordinary skill in the art had the requisite motivation to combine the prior art, as IBS’s sole argument was that a person of skill would be motivated to combine the prior art to achieve 100 percent deblocking. In light of the evidence that the azido group would achieve less than 80 percent deblocking, IBS had failed to provide a credible explanation for how the combination of prior art would achieve this goal.

Recognizing this gap in its case, IBS attempted introduce new arguments and evidence in its reply brief to the PTAB, arguing that a person of skill would know to modify the procedure in the prior art to create the claimed patent. But the PTAB disregarded IBS’s reply brief, finding that it fell afoul of 35 USC § 312(a)(3) and 37 CFR § 42.23(b), which require that all arguments be included in the initial petition and that replies may only respond to arguments raised in the corresponding brief. The Federal Circuit agreed that, because IBS initially argued that the prior art was sufficient to make the claimed invention, but provided new arguments and evidence in its reply, it had failed to provide all its arguments with particularity in its initial petition. This was an improper new rationale for motivation to combine, so the PTAB did not need to consider it in its deliberations. Furthermore, because the PTAB is not required to “parse the reply brief to determine which, if any, parts of that brief are responsive and which are improper,” the entire brief could be disregarded.


PATENTS / IPR / AMENDMENTS

Burden on Motion to Amend in IPR


Applying its own precedent, the US Court of Appeals for the Federal Circuit confirmed that the burden remains on the patent owner to demonstrate the patentability of substitute claims over the art of record in an inter partes review (IPR), and therefore the Patent Trial and Appeal Board (PTAB or Board) need only consider those arguments raised by the patent owner for patentability. In re Aqua Products, Inc. Case No. 15-1177 (Fed. Cir., May 25, 2016) (Prost, J).

Aqua Products sued Zodiac alleging infringement of a patent relating to a swimming pool cleaner. In response, Zodiac filed an IPR petition. During the IPR proceeding, the PTAB denied Aqua Products’ motion to amend claims. Aqua Products appealed, arguing that the PTAB erred by placing the burden on the patentee to show non-obviousness. Aqua Products also argued that the PTAB abused its discretion by not considering all of the new claim limitations and the objective indicia of non-obviousness.

Citing Microsoft v. Proxyconn (IP Update, Vol. 18, No. 7) and Nike v. Adidas (IP Update, Vol. 19, No. 3), the Federal Circuit panel declined to revisit its prior holdings that the patent owner has the burden to “demonstrate the patentability of substitute claims over the art of record.” The Federal Circuit also found no abuse of discretion in the PTAB’s decision to rebut only the sole argument for patentability raised by Aqua Products. As the Court explained, “[t]o hold otherwise would require the Board to fully reexamine the proposed claims in the first instance, effectively shifting the burden from the patentee to the Board.” Because Aqua Products’ motion to amend focused on a single claim limitation, “the [PTAB] had no obligation to address the other amendments or to consider the issue of objective indicia of non-obviousness, which Aqua [Products] did not raise” in its motion to amend.

Practice Note: As observed by the Federal Circuit, most of the patentability arguments Aqua Products made on appeal were made in the course of the main IPR proceedings, but not in connection with the motion to amend itself. When filing a motion to amend, the patent owner cannot rest on arguments outside of the motion.

McDermott was counsel to petitioner at the PTAB in this case.


PATENTS / ON-SALE BAR

Binding Contract or Completed Sale Not Necessary to Raise On-Sale Bar


Rebecca Harker Duttry

Addressing the minimum requirements for raising an on-sale bar defense to patent infringement, the US Court of Appeals for the Federal Circuit reversed the district court, explaining that “[a]n offer to sell is sufficient to raise the on-sale bar, regardless of whether that sale is ever consummated.” Merck & CIE v. Watson Labs., Inc., Case Nos. 15-2063; -2064 (Fed. Cir., May 13, 2016) (Mayer, J).

In 2000, Merck filed a patent directed to a crystalline calcium salt of tetrahydrofolic acid (MTHF). In 2013, Bayer (a Merck subsidiary) brought suit against Watson for infringing the patent based on Watson’s Abbreviated New Drug Application (ANDA) filing. Watson stipulated to infringement and the key issue on appeal was whether the asserted claim was invalid under the on-sale bar.

Under the pre-America-Invents-Act version of § 102(b) (applicable here), an on-sale bar is triggered when a claimed invention (1) is ready for patenting and (2) is the subject of a commercial offer for sale prior to the critical date. On appeal, Merck did not challenge the district court’s determination that MTHF was ready for patenting by September 1998, limiting the issue in this case to whether there was an invalidating commercial offer to sell the product prior to the critical date of April 17, 1999.

Prior to the critical date, Weider contacted Merck requesting information on the price for two kilograms of MTHF. In September 1998, Merck responded with a signed fax containing details regarding the price, payment and delivery terms. Weider responded to Merck’s fax, requesting an order of two kilograms of MTHF for delivery to Weider’s Salt Lake City, Utah, facility, as well as a specification sheet for the raw material, material safety data sheets and a certificate of insurance. Merck sent Weider the requested materials along with a letter confirming that Weider had placed a “first order” for two kilograms of MTHF. In 1999, the parties made a mutual decision to cancel Weider’s existing order for MTHF. The district court concluded that because the agreement for the sale of MTHF was not reduced to writing and signed by both parties, there had been no legally binding sale and thus no invalidating commercial offer for sale or sale of the product. Watson appealed.

On appeal, the Federal Circuit reversed. At the district, Merck highlighted post hoc testimony by those involved in the agreement to support its argument that the agreement was insufficient to constitute an offer for sale because it was allegedly missing key terms. However, the Federal Circuit found that such post hoc testimony cannot override what was “abundantly plain from the price, quantity and delivery terms” on the face of the September 1998 fax. The offer was not qualified in any way, and in the weeks following Merck’s fax setting forth the relevant details, both parties proceeded on the understanding that Merck had made an offer to sell MTHF. Prior to the cancellation of the order, the parties exchanged further information about the transaction, and Merck sent a letter confirming Weider’s order for two kilograms of MTHF. The Court noted, “[a]n offer to sell is sufficient to raise the on-sale bar, regardless of whether that sale is ever consummated.” Thus, the Court found that because Merck’s September 1998 offer to sell MTHF was a premature commercial exploitation of its invention, complete with essential price, delivery and payment terms, the asserted claim was invalid under the on-sale bar.


PATENTS / CLAIM CONSTRUCTION

Narrow Construction May Apply When No Evidence Supports Broader Construction


Addressing claim construction issues, the US Court of Appeals for the Federal Circuit affirmed a claim construction limiting “communications path” to wired communications. Ruckus Wireless, Inc. v. Innovative Wireless Solutions, LLC, Case Nos. 15-1425; -1438 (Fed. Cir., May 31, 2016) (Reyna, J) (Stark, J, dissenting).

Innovative Wireless Solutions (IWS) sued several dozen hotels and coffee shops for patent infringement, alleging that they infringed the asserted patents by providing wifi internet access using off-the-shelf wifi equipment. In response, the wifi equipment providers, Ruckus and Cisco, filed for declaratory judgment of invalidity and non-infringement.

The central dispute was whether the claimed “communications path” covered wireless communications. IWS argued that “communications path” covered both wired and wireless communications, while Ruckus and Cisco argued that it should be limited to only wired communications. Agreeing with Ruckus and Cisco, the district court adopted a construction limiting “communications path” to wired communications. After the parties stipulated to a final judgment of non-infringement based on that construction, IWS appealed.

On de novo review, a divided panel of the Federal Circuit affirmed. Writing for the majority, Judge Reyna reasoned there was “no intrinsic or extrinsic evidence to support IWS’s assumption that a person of ordinary skill at the time of invention would have understood the plain and ordinary meaning of ‘communications path’ to include wireless communications.” The majority identified several statements from the specification, but acknowledged that “these statements do not expressly exclude wireless communications from the meaning of ‘communications path,’” although “they do not include it, and they discourage that understanding.” The majority also found that construing the claims to encompass wireless communications “would likely render the claims invalid for lack of written description.”

Judge Stark, sitting by designation, dissented. He explained that a remand was necessary because the dispute over the plain and ordinary meaning of “communications path” first arose on appeal. In these circumstances, Judge Stark explained, the court should “not fault the patentee for failing to come forward with extrinsic evidence” but “should give the patentee a chance to do so—particularly because the district court may have to make subsidiary findings of fact in order to construe the claims.” The dissent also disagreed with the majority’s conclusion that the proper construction excludes wireless communications.


PATENTS / CLAIM CONSTRUCTION

Look to Specification to Interpret Facially Unclear Claims


Alexander P. Ott

Addressing claim construction issues, the US Court of Appeals for the Federal Circuit reiterated the necessity of reading claims in the context of the written description when they are not clear on their face. Howmedica Osteonics Corp. v. Zimmer, Inc., Case Nos. 15-1232; -1234; -1239 (Fed. Cir., May 12, 2016) (Plager, J).

Howmedica sued three companies for infringing a patent directed to a socket assembly for prosthetic hip implants with claims that required a bearing secured into a shell having a recess and a taper “placed at relative locations such that the effectiveness . . . is maintained.” During claim construction, the defendants argued that the relative location claim language required the recess to be “essentially midway” along the taper, and separately argued that the claims required an additional “sleeve” component. The “essentially midway” position was premised on amendments made during a reexamination that added the “relative location” language to the claims along with a written description passage that described the recess as being essentially midway along the taper. The district court agreed with the defendants on both constructions.

Howmedica sought a stipulated judgment of non-infringement based solely on the “sleeve” construction. The defendants refused and moved for summary judgment based on both the “sleeve” and the “essentially midway” constructions. Howmedica argued that summary judgment with respect to the “essentially midway” construction was not proper because it still had a doctrine of equivalents position. The district court disagreed, finding that Howmedica failed to properly amend its infringement contentions to include the doctrine of equivalents, and that boilerplate equivalents position in Howmedica’s infringement contentions was not sufficient. Howmedica appealed to the Federal Circuit.

On appeal, the Federal Circuit agreed with the “essentially midway” construction. According to the Federal Circuit, because the claims fail to explain how to “place” the elements to maintain effectiveness, one of ordinary skill in the art would naturally look to the written description. After looking to the written description, the Court concluded that the “essentially midway” construction was correct because that was the only arrangement disclosed. On appeal, Howmedica argued that this construction impermissibly limited the claims to the preferred embodiment, ignored written description language that characterized the embodiments as exemplary, and violated the rule of claim differentiation. The Federal Circuit rejected the preferred embodiment argument as misreading the written description. It also gave no effect to the written description’s characterization of its disclosure as merely exemplary. Finally, the Court noted that claim differentiation is merely a rebuttable presumption and found it rebutted in this case.

The Federal Circuit also found no abuse of discretion in the district court’s treatment of Howmedica’s doctrine of equivalents assertion, and affirmed the judgment. As for the “sleeve” construction, the Federal Circuit declined to address the district court’s conclusion, finding the “essentially midway” issue to be dispositive.


PATENTS / CLAIM CONSTRUCTION

When Distinguishing Statements May Be Considered Disclaimers of Claim Scope


Joseph Speyer, PhD

Addressing disclaimer of claim scope, the US Court of Appeals for the Federal Circuit affirmed the district court’s summary judgment of non-infringement, finding that the patentee clearly and unmistakably disclaimed particular techniques for performing the claimed process. David Netzer Consulting Eng’r LLC v. Shell Oil Co., Case No. 15-2086 (Fed. Cir., May 27, 2016) (Lourie, J).

Netzer sued Shell for infringement of a patent directed to a process for the coproduction of ethylene and benzene from refinery mixtures. The claimed process requires a step of “fractionating the pyrolysis gasoline to form a purified benzene product comprising at least about 80 wt [percent] of benzene.” Shell moved for summary judgment of non-infringement, arguing that the term “fractionating” refers to conventional distillation, and that Shell’s accused process uses extraction (not distillation) to form a benzene product with 99.9 percent purity. The district court granted Shell’s motion without formally construing the claims, finding that fractionating does not include extraction. Netzer appealed.

On appeal, Netzer argued that fractionating means separating a mixture into fractions, no matter what processes are used to do so, and that no disclaimer was explicitly made in the specification. Shell argued that fractionating means distilling, and that the patentee disclaimed extraction by distinguishing it from fractionation.

The Federal Circuit agreed with Shell that fractionating means distilling and excludes extraction. As the Court explained, the specification repeatedly and consistently used fractionation to refer to distillation. The patentee described problems that would be impossible for conventional distillation as being impossible for conventional fractionation. Elsewhere, the patentee repeatedly referred to fractionation within the context of distillation. Moreover, the Court found that the patentee made clear and unmistakable statements that distinguished fractionation from extraction, such as by characterizing extraction as expensive and unnecessary in light of market demand, both in the specification and during prosecution.

Netzer also argued that even under Shell’s proposed construction, Shell should be found to infringe because the accused process includes distillation and results in a purified benzene product. The Federal Circuit disagreed, explaining that Shell’s process only distills the mixture to 57 percent purity, then uses extraction to produce a 99.9 percent pure product. In particular, Shell’s process does not perform the step of “fractionating the pyrolysis gasoline to form a purified benzene product comprising at least about 80 wt [percent] of benzene” because the “purified benzene product” is formed by extraction, not fractionation.

Practice Note: Use caution with statements distinguishing the subject matter of an application from the prior art, especially when wordsmithing or using a term without an accepted meaning in the art.


PATENTS / CLAIM CONSTRUCTION

Intrinsic Feature in All Described Embodiments Makes Claim Insurmountable **WEB ONLY**


Addressing issues of claim construction, the US Court of Appeals for the Federal Circuit affirmed a district court, finding that no reasonable juror could find infringement where none of the accused products contained features that met the disputed claim limitation. Profectus Technology LLC v. Huawei Technologies Co., Ltd., Case Nos. 15-1016; -1018; -1019 (Fed. Cir., May 26, 2016) (Reyna, J) (Moore, J, dissenting).

The patent owner sued manufactures and sellers of tablet computer devices for infringement of patent claims directed to a mountable digital picture frame for displaying digital images. The disputed claim language of the asserted independent claims included “[a] stand alone and mountable picture display for displaying still digital pictures,” and “a mountable picture frame adapted to digitally display at least one still image thereon.” Relying on a general dictionary definition, the plaintiff asked for the plain and ordinary meaning of “mountable,” which the plaintiff asserted only requires something that is “capable of being mounted.” The defendant proposed a construction that would require “a support for affixing on a wall.” Adopting neither party’s proposal, the district court instead construed the term to mean “having a feature designed for mounting,” and found that the picture frame or display must have some intrinsic mounting feature—not just a feature that could potentially render the frame or display capable of being mounted. Finding that the accused products lacked an intrinsic mounting feature, the district court granted summary judgment of no infringement. The patent owner appealed.

The Federal Circuit affirmed the district court’s claim construction, and a majority affirmed the grant of summary judgment. The Federal Circuit found that the plaintiff’s argument for “plain and ordinary meaning,” supported by dictionary definitions, could not overcome the intrinsic evidence where every disclosed embodiment of the claimed picture display or frame in the specification includes an intrinsic feature for mounting the device to a wall or on a tabletop. The panel majority also rejected the patent owner’s assertion that genuine issues of material fact precluded a finding of summary judgment. Specifically, the patent owner argued that a jury should be permitted to consider whether the general size, shape, lightweight nature and thinness of the accused devices are features for mounting. Plaintiff also argued that communication or charging ports of the devices intended to be used with a docking station are features for mounting.

Regarding the ports, the Federal Circuit found that just because an external component can utilize ports intended primarily for power, data and communication to help prop up an accused device does not convert the port into an inherent feature for mounting. The Court explained that while the accused devices are capable of “mounting” by exploiting the communication ports and being easy to prop up because of their size and weight, those characteristics do not make the accused devices “mountable” as claimed, and the infringement issue does not rise to the level of a factual dispute. The Court also found that if the accused devices remained upright, it is only because the docking stations created an environment to prevent the otherwise featureless devices from toppling over.

The dissent would not have affirmed summary judgment. According to Judge Moore, the record evidence, when viewed in the light most favorable to the plaintiff, raised a genuine dispute over whether the communication ports are a feature for mounting. In support, she explained that the construction does not require having a feature that is exclusively for mounting, that the manufacturers’ intended purpose of the ports’ design should not affect the infringement analysis, and that the specification expressly contemplates the use of additional parts to achieve mounting, which may implicate the alleged role of the docking stations. In her opinion, the facts raised by the patent owner should be presented to a jury.


PATENTS / LICENSES

Most-Favored Licensee Entitled to Refund of 99 Percent of Lump Sum Royalty


The US Court of Appeals for the Fifth Circuit ruled that a most-favored licensee clause allowed a licensee that paid a lump sum of $70 million to be entitled to a refund when a subsequent licensee paid a lump sum of only $250,000. The refund applied to royalties paid both before and after the more favorable license. JP Morgan Chase Bank, N.A. v. DataTreasury Corp., Case No. 15-40905 (5th Cir., May 19, 2016) (Davis, J) (Higginson, J, dissenting in part).

In 2005, to resolve a patent infringement action filed by DataTreasury against JP Morgan, the parties entered into a license agreement under which JP Morgan would pay DataTreasury $70 million for use of one of DataTreasury’s check processing patents. The license agreement contained a “most-favored licensee” clause, which provided that if DataTreasury granted a similar license to anyone else, JP Morgan would “be entitled to the benefit of any and all more favorable terms.”

Seven years later, DataTreasury entered into a license agreement with Cathay General Bancorp that allowed Cathay to use the same DataTreasury patent for only $250,000. After it learned of Cathay’s cheaper license, JP Morgan began litigation to recover the difference between the $70 million it paid and the $250,000 paid by Cathay.

The dispute centered on whether the most-favored licensee clause applied retroactively—that is, to royalties JP Morgan paid during the entire term, including before Cathay’s license—or only prospectively, on royalties paid after Cathay’s more favorable license agreement. DataTreasury argued that JP Morgan was only entitled to a refund on royalties paid since 2012, the date of Cathay’s license.

The Fifth Circuit found that most-favored licensee clauses apply prospectively to running royalties but can also apply retroactively to lump sum royalties. A preliminary issue was whether JP Morgan’s royalties should be classified as lump sum royalties or running royalties. Under its license agreement, JP Morgan agreed to pay a total of $70 million but was allowed to pay in installments. The Court explained that this was a lump sum royalty because, according to the agreement, JP Morgan’s failure to pay any of the installments would terminate the entire license, in both the future and the past. In contrast, failure to make one payment of a running royalty would affect only the uses covered by that single payment, not previous uses.

JP Morgan was, therefore, entitled to a refund for all royalties paid since the parties first entered into their agreement in 2005, even before Cathay’s agreement. The Fifth Circuit distinguished case law that applied most-favored licensee clauses only to royalties paid after the more favorable license arose. Those cases all addressed licenses with running royalties. In contrast, JP Morgan’s most-favored licensee clause meant that all of its lump sum royalties should be reduced to the amount it would have paid under Cathay’s agreement.


PATENTS / STANDING

To Confer Standing, Assignment Must Transfer Entire Exclusive Right


Addressing the issue of standing, the US Court of Appeals for the Federal Circuit affirmed a district court’s dismissal of a patent case brought by an exclusive licensee, finding that the original assignee had not transferred all substantial rights to the patents-in-suit to the plaintiff, and thus the plaintiff alone did not have standing to sue. Diamond Coating Technologies, LLC v. Hyundai Motor America, et al., Case No. 15-1844 (Fed. Cir., May 17, 2016) (Wallach, J).

The patents-in-suit list Sanyo as the original assignee. Diamond Coating Technologies and Sanyo signed a “Patent Assignment and Transfer Agreement” whereby, among other things, (1) Diamond could not assign the agreement to another party without Sanyo’s consent; (2) Sanyo retained an economic interest in future proceeds, including any that arise from infringement litigation; (3) Sanyo retained a license to make, use and sell products covered by the patents-in-suit; and (4) Diamond must act in the best interest of both Sanyo and Diamond when making decisions on enforcement.

On Hyundai’s motion, the district court dismissed the action, finding that the agreement did not confer patentee status on Diamond and thus Diamond could not bring suit without joining Sanyo. The district court also found that nunc pro tunc agreements executed by Diamond and Sanyo after dismissal could not be used to support retroactive standing. Diamond appealed.

The Federal Circuit explained that to create a standing, a contract must transfer “the entire exclusive patent right,” and that an agreement that fails to do so is merely a license. The court noted that it has not allowed labels to control by treating bare formalities of “title” transfer as sufficient to determine that an “assignment” of the entire exclusive right has occurred. Rather, a determination of whether a transfer of rights is an assignment or a license requires an examination of the substance of what was granted.

Noting that the exclusive right to make, use and sell is “vitally important” to the determination, the Federal Circuit concluded that the agreement between Sanyo and Diamond constituted a mere license because Sanyo retained significant rights. Finally, the Court held that nunc pro tunc assignments are not sufficient to confer retroactive patentee status, and that Sanyo and Diamond’s second agreement that attempted to “clarify the parties’ original intent” but was entered into after the district court dismissed the original suit did not factor into the determination.

Practice Note: When a defendant is confronted by a non-practicing entity suit where standing is alleged based on an agreement between it and the original patent owner, the agreement should be carefully analyzed to determine if there are standing defects, especially in cases where the original patent owner is not a party to the lawsuit.


PATENTS / HATCH-WAXMAN ACT

No Approval for Generic Product for Treatment of Rosacea **WEB ONLY**


Addressing infringement under the doctrine of equivalents and obviousness issues, the US Court of Appeals for the Federal Circuit affirmed the district court’s ruling barring approval of a generic version of Finacea® gel until November 2018. Intendis GmbH, et al. v. Glenmark Pharms. Inc., USA, et al., Case No. 15-1902 (Fed. Cir., May 16, 2016) (Moore, J).

Intendis is the assignee of a patent directed to compositions containing azelaic acid, which is listed in the Orange Book as covering Finacea® gel, a treatment for rosacea. Glenmark developed a generic version of Finacea® gel and filed an Abbreviated New Drug Application (ANDA) with the US Food and Drug Administration (FDA), asserting that the Intendis patent was invalid and that Glenmark’s generic version did not infringe. Following a trial, the district court found that Glenmark’s ANDA product infringed Intendis’s patent under the doctrine of equivalents, and that the asserted claims were not obvious because there was no motivation to combine the proposed prior art references and no reasonable expectation of success in making such a combination, and because the unexpected results and commercial success weighed in favor of non-obviousness. Glenmark appealed both rulings to the Federal Circuit.

With respect to infringement under the doctrine of equivalents, the Federal Circuit found that the only question in dispute was whether Glenmark’s isopropyl myristate had the same function as the combination of triglyceride and lecithin in the patent, and, in this case, there was sufficient evidence for the district court to conclude that it did. The panel noted that Glenmark had repeatedly asserted to the FDA both that isopropyl myristate acted as a penetration enhancer in its ANDA product, and that lecithin and triglyceride served the same purpose in Finacea® gel. The panel also rejected Glenmark’s argument that the doctrine of equivalents could not apply because the specification did not explicitly call out this function, stating that “[w]e have never held that a patent must spell out an element’s function, way and result in order for the doctrine of equivalents to apply to that element.” The court further rejected the argument that a finding of equivalence would encompass the prior art, finding that Glenmark’s proposed hypothetical claim covering all penetration enhancers was too broad and that prosecution history estoppel did not prevent Intendis from asserting equivalence with respect to a lecithin-free composition.

Finally, the Federal Circuit affirmed the non-obviousness finding, ruling that although one of skill in the art would have been motivated to pursue an azelaic acid compound based on the prior art, one would not have been motivated to use the combination of triglyceride and lecithin claimed in the patent as excipients.


PATENTS / ANTITRUST AND LANHAM ACT / MONOPOLIZATION AND FALSE ADVERTISING

Second Circuit Affirms Dismissal of Sham Citizen Petition Claim, Summary Judgment on False Advertising Claims **WEB ONLY**


Addressing Sherman Act and Lanham Act claims arising out of an Abbreviated New Drug Application (ANDA), the US Court of Appeals for the Second Circuit upheld the district court’s dismissal of the plaintiffs’ Sherman Act claim that the defendant filed a sham citizen petition with the US Food and Drug Administration (FDA) to hinder plaintiffs’ competing generic product, and also affirmed the district court’s granting of the defendant’s motion for summary judgment on the plaintiffs’ Lanham Act false advertising claims relating to the defendant’s advertisements for the same competing product. Apotex Inc., et al. v. Acorda Therapeutics, Inc., Case No. 14-4353 (2d Cir., May 16, 2016) (Jacobs, J).

Apotex and Acorda Therapeutics are competing manufacturers of tizanidine, a drug used to treat spasticity but with drowsiness as a common side effect. Apotex began selling generic tizanidine tablets in 2004, around the same time that Acorda acquired the rights to sell tizanidine tablets and capsules under the trade names Zanaflex and Zanaflex Capsules, respectively.

In 2007, Apotex filed an ANDA relating to generic tizanidine capsules, which would compete with Acorda’s Zanaflex Capsules. Acorda filed a citizen petition with the FDA, raising concerns about Apotex’s ANDA. The FDA denied Acorda’s citizen petition on February 3, 2012, and on the same day approved Apotex’s ANDA. Apotex launched its generic tizanidine capsules product, and Acorda countered with its own authorized generic version of Zanaflex Capsules.

Apotex filed suit in district court, alleging that Acorda filed a sham citizen petition with the FDA to delay approval of Apotex’s competing capsule formulation in violation of § 2 of the Sherman Act. Apotex also alleged that in the course of Acorda’s marketing of its tizanidine capsules, Acorda violated the Lanham Act’s proscription on false advertising by making misrepresentations to physicians and in promotional material regarding the effect of Zanaflex Capsules in reducing drowsiness as compared to the tablet form. The district court found that “the simultaneous approval by the FDA of Apotex’s [ANDA] and its denial of Acorda’s citizen petition (raising concerns about the ANDA) was by itself insufficient to support a Sherman Act claim.” After discovery, the district court granted summary judgment and dismissed all of Apotex’s Lanham Act false advertising claims on the grounds that none of Acorda’s representations (with one exception) were literally false or likely to mislead consumers, and that Acorda failed to show that the false depiction in one graph “would meaningfully impact consumers’ purchasing decisions.” Apotex appealed.

On appeal, the Second Circuit affirmed, finding that Apotex failed to show that Acorda’s citizen petition was objectively baseless. A prior case, DDAVP, established an inference that the citizen petition is a sham when the petition is denied simultaneously with the grant of an ANDA petition. However, the Second Circuit highlighted recent FDA guidance that undermines that inference. Specifically, the FDA guidance favors contemporaneous adjudications of ANDA applications and citizen petitions so as to safeguard the procedural rights of ANDA applicants such as Apotex.

The Second Circuit also upheld the district court’s grant of summary judgment on Apotex’s Lanham Act false advertising claims. First, the Court held that Acorda’s advertisements could not form the basis for Lanham Act claims to the extent they were in line with the FDA-approved label for Zanaflex Capsules. Although Apotex alleged that certain of Acorda’s representations exceeded the boundaries imposed by the FDA label, the Court held that Apotex failed to show that those representations were inconsistent with the FDA label in a manner sufficient to support a false advertising claim, as there was no evidence that the representations were false.

Finally, although the Second Circuit agreed with the district court’s conclusion that “a reasonable juror could determine” that one graph “communicates a literally false message,” it found that Apotex failed to show that the misrepresentation was material such that it was likely to influence consumers’ purchasing decisions.


America Invents Act

AIA / CBM / ELIGIBILITY FOR COVERED BUSINESS METHOD PATENT REVIEW

PTAB Still Divided Over What Patents Qualify for CBM Review


Brian A. Jones

Last month, we noted two recent Patent Trial and Appeal Board (PTAB) decisions that appeared to signal a more exacting standard for defining what patents may qualify as covered business method patents, focused on finding a hook in the claims for a financial product or service. (IP Update, Vol. 19, No. 5). Despite those decisions, PTAB panels are still split on how to assess whether the patent is directed to a financial product or service. Two recent decisions, AT&T Mobility LLC v. Intellectual Ventures II LLC, CBM2015-00185 (PTAB May 4, 2016) (Braden, APJ) and Apple Inc. v. Mirror World Techs., LLC, CBM2016-00019 (PTAB May 26, 2016) (Giannetti, APJ) (McKone, APJ concurring), show divided interpretations over how explicitly the claims must be tied to a financial product or service.

The PTAB panel in AT&T Mobility found that the challenged patent did not claim a method or apparatus for a financial product or service. The claims of the challenged patent were directed to a system for providing directory call assistance to cellular telephone users with the appropriate back-end switching translations. Although the specification explained that such switching translations were helpful for billing, the claims did not specifically recite a “billing” limitation. In denying institution, the panel was careful to clarify that it did not require a “literal recitation of financial product or services in a claim,” only that a claim term be “rooted” in the financial sector. The panel determined that the claimed invention was one of general applicability and thus dismissed the statements in the specification showing the invention’s potential benefits to the financial sector and applicability to the financial activity of “billing.” Mere examples of potential usefulness to the financial sector were insufficient to make the patent eligible for CBM review.

In contrast, the majority in Mirror World determined that the challenged patent was eligible for CBM review, even without identifying any terms in the claims that were arguably rooted in the financial sector. The claims were directed to organizing data streams from multiple sources though a time-ordered storage model with filters for organizing, locating, summarizing and monitoring incoming data. The claims were generic to streams of “data units” and did not identify, financial or otherwise, any particular purpose or field of use for such data stream operations. Nevertheless, the majority found that examples in the specification, showing that the claimed device could be used in the financial sector, were sufficient to make the patent eligible for CBM review. The majority rejected the notion that a claimed invention could have “general applicability” and avoid CBM review when the specification specifically provided financial-related embodiments showing that the claims covered potential uses in the financial sector.

The concurrence dissented from the majority’s CBM eligibility determination, advocating instead for a stricter application in which the claim language itself must explicitly or inherently indicate the financial nature of the invention. Interpreting the Federal Circuit’s decision in Blue Calypso (IP Update, Vol. 19, No. 4) as a clear directive to seek out such explicit or inherent language in the claims, the concurrence would have found the patent to be one of general applicability with merely a potential for use in the financial sector. Accordingly, it would have found the patent ineligible for CBM review. The concurrence warned that CBM review would be overly expansive if all that was required to show CBM eligibility was that the claims were broad enough to cover possible use in the financial sector.


AIA / IPR / MOTION TO AMEND

PTAB Grants Late Motion to Amend, But Amended Claims Fail to Breathe Life into Patent


Addressing the standards for a motion to amend claims during an inter partes review (IPR) proceeding, the Patent Trial and Appeal Board (PTAB or Board) granted a motion to amend the claims in an IPR, but ultimately denied entry of the substitute claims as unpatentable. Alcohol Monitoring Systems, Inc. v. Soberlink, Inc., Case No. IPR2015-00556 (PTAB, May 3, 2016) (McKone, APJ).

The challenged patent relates to remote sobriety monitoring using a breath testing and identification device. Several claims of the patent-in-question were challenged in an earlier related IPR and found to be unpatentable (IP Update, Vol. 18, No. 8). Claims not addressed in the earlier IPR were at issue in this proceeding. Following the PTAB’s decision to institute IPR, instead of filing a response defending the challenged claims, the patent owner filed a motion to amend, requesting cancellation of all claims and entry of substitute claims. Requests solely to cancel claims typically are granted without substantive review. A request that seeks to substitute claims is not entered automatically, but only upon the patent owner demonstrating the patentability of the substitute claims. Amendments may not seek to enlarge the scope of the claims or introduce new matter.

In response to the patent owner’s motion to amend, the petitioner argued that the substitute claims were impermissibly broadened. As a result of the patent owner’s failure to provide substantive argument or evidence to the contrary, the PTAB found that the original motion to amend failed to meet the requirements of a proper amendment under § 316(d)(3). The patent owner then filed a reply, accompanied by a revised set of proposed substitute claims alleged to address the petitioner’s arguments. Under § 316(d)(1)(B), a patent owner is authorized to file one motion to amend; additional motions to amend are unauthorized and may only be permitted at the PTAB’s discretion. Although the patent owner did not comply with the rules in pursuing the second amendment, the PTAB ruled that the amendment should nevertheless be considered, as it eliminated one of the disputes between the parties by restoring in some respects the claim language to its original scope.

When seeking entry of an amendment to the claims in an IPR, the patent owner bears the burden of proof to establish that it is entitled to the relief requested. In considering the substitute claims, the PTAB first reviewed whether the substitute claims introduced new subject matter. In its reply to the petitioner’s opposition, the patent owner admitted that it had attached an incorrect version of its claim chart in its motion to amend, and provided an amended version that the PTAB declined to consider. The PTAB concluded that the patent owner’s evidence (even if considered in view of the amended claim chart) was insufficient to demonstrate written description support for the substitute claims. The PTAB then turned to the prior art, finding that the patent owner failed to meet its burden to demonstrate that any of the substitute claims were patentable over the prior art. For these reasons, the PTAB denied entry of the substitute claims.

Practice Note: In its decision, the PTAB pointed to certain failures in the patent owner’s arguments, including its attacks on the prior art references individually rather than collectively, expert testimony without citation to evidence, and failure to establish a nexus between the objective evidence presented and the merits of the claimed invention.


AIA / PTAB / PRECEDENTS

PTAB Provides Procedural Guidance, Designates Five Opinions as Precedential


On May 10, 2016, the Patent Trial and Appeal Board (PTAB or Board) designated five post-grant trial decisions as precedential, bring the total number of precedential decisions in inter partes review (IPR) and covered business method (CBM) proceedings to eight. Of the five decisions, two address additional discovery and the remaining three address, respectively, the one-year time period for filing a petition, the amendment of claims and the requirements for PTAB consideration of a petition. A summary of the holdings follows.

The PTAB upgraded Garmin Int’l, Inc. v. Cuozzo Speed Techs. LLC, Case No. IPR2012-00001 (PTAB, Mar. 5, 2013) (Lee, APJ) from informative to precedential. In the decision, the PTAB identified five factors that it considers when deciding whether additional discovery is “necessary in the interest of justice.” The factors include the following:

  • Whether there is more than a possibility and a mere allegation that the discovery will produce something useful
  • Whether the discovery request is asking the other party’s litigation positions and underlying basis for those positions
  • Whether the requester has the ability to obtain the information by other means
  • Whether the instructions to locate the documents are easy to understand
  • Whether the request is unduly burdensome

This case is the subject of a decision by the Supreme Court of the United States issued on June 20, 2016, discussed in this edition of IP Update. Additional analysis can be found in IP Update, Vol. 16, No. 12.

In Bloomberg, Inc. v. Markets-Alert Pty, Ltd., Case No. CBM2013-00005 (PTAB, May 29, 2013) (Chang, APJ), the PTAB addressed a motion for additional discovery in a CBM review. Because CBM reviews share the same public policy, statutory and regulatory considerations or discovery as IPRs, the PTAB held that the Garmin factors are helpful in determining whether to grant additional discovery in a CBM review. The PTAB slightly modified the factors for the CBM context, however, because of the heightened standard of “for good cause” in granting additional discovery. Further analysis can be found in IP Update, Vol. 17, No. 4.

In Oracle Corp. v. Click-to-Call Techs, LP, Case No. IPR2013-00312 (PTAB, Oct. 30, 2013) (Zecher, APJ), the PTAB only made Section III.A of the order precedential. In that section, the PTAB rejected the patent owner’s argument that the petition was barred pursuant to 35 USC § 315(b), which requires filing of an IPR petition within one year of service of a complaint. The original complaint on which the patent owner relied, however, was dismissed voluntarily without prejudice, pursuant to a joint stipulation. The US Court of Appeals for the Federal Circuit holds that the effect of such dismissals leaves the parties as though the action had never been brought. Therefore, the patent owner could not rely on the earlier filed complaint to bar the petition. Further analysis can be found in IP Update, Vol. 17, No. 11.

In MasterImage 3D, Inc. v. RealD Inc., Case No. IPR2015-00040 (July 15, 2015) (Lee, APJ), the PTAB clarified the burden of the patent owner in a motion to amend. The patent owner has the burden to show a patentable distinction over the prior art of record and the prior art known to the patent owner. The PTAB clarified that prior art of record includes (1) material art from the prosecution history of the patent, (2) material art of record in the current proceeding, and (3) any material art of record in another proceeding before the US Patent and Trademark Office. Prior art known to the patent owner is no more than material prior art the patent owner makes of record in the current proceedings under its duty of candor and good faith. Finally, the PTAB explained that “once Patent Owner has set forth a prima facie case of patentability of narrower substitute claims over the prior art of record, the burden of production shifts to Petitioner.” Further analysis can be found in IP Update, Vol. 18, No. 8.

In Lumentum Holdings, Inc. v. Capella Photonics, Inc., Case No. IPR2015-00739 (Mar. 4, 2016) (Tartal, APJ), the PTAB denied a motion to terminate and held that 35 USC § 312(a) was not jurisdictional. Rather, § 312(a) merely sets forth requirements that a petition must satisfy, including naming all parties of interest. A lapse in compliance with § 312(a) does not deprive the PTAB of jurisdiction or preclude it from permitting such lapse to be rectified. Further analysis can be found in IP Update, Vol. 18, No. 8.


Trademarks

TRADEMARKS / AWARD OF ATTORNEYS’ FEES

Extending the Reach of Octane Fitness Under the Lanham Act **WEB ONLY**


The US Court of Appeals for the Fifth Circuit adopted and applied the Supreme Court of the United States’ rationale for an award of attorneys’ fees in patent cases to a trademark case. In doing so, the Fifth Circuit aligned its interpretation of what constitutes an “exceptional” case under the Trademark Law (15 USC § 1117) with the meaning of an “exceptional” case under the Patent Laws (35 USC § 285). Baker v. DeShong, Case No. 14-11157 (5th Cir., May 3, 2016) (Stewart, J).

Clark Baker is a private investigator and former police officer who is CEO of the Office of Medical and Scientific Justice, Inc. (OMSJ). OMSJ identifies as a nonprofit corporation dedicated to investigating medical and scientific corruption cases. Through its websites, OMSJ markets services to defend individuals accused of concealing their HIV-positive status and subsequently transmitting the disease to uninfected individuals.

Jeffrey DeShong launched two websites critical of OMSJ: www.hivinnocencegrouptruth.com and www.hivinnocenceprojecttruth.com. DeShong acknowledged that his websites were created to deconstruct information posted on OMSJ’s “HIV Innocence Group” website, and in particular to rebut what he considered OMSJ’s false research and misrepresentations surrounding HIV and AIDS.

After DeShong launched the websites, Baker and OMSJ filed suit alleging trademark infringement under the Lanham Act and Texas state law claims for trademark infringement, defamation and business disparagement. The district court dismissed the Lanham Act claims, finding that even if the allegations were accepted as true, a reasonable person could not confuse the content on DeShong’s website with the OMSJ “HIV Innocence Group” trademark. The district court then declined to exercise jurisdiction over the state law claims. Eventually DeShong, through pro bono counsel, moved for attorneys’ fees under § 1117(a) of the Lanham Act. The district court applied the Fifth Circuit’s standard requiring clear and convincing evidence that a case be brought in bad faith in order to be deemed exceptional and denied an award of fees. DeShong appealed, arguing that the Supreme Court’s 2014 decision in Octane Fitness, LLC v. Icon Health and Fitness, Inc. (IP Update, Vol. 17, No. 5) should control.

On appeal, the Fifth Circuit agreed with DeShong and adopted the Octane Fitness approach to awarding fees for an exceptional case. The Fifth Circuit identified the parallels between its previous bad faith standard and the US Court of Appeals for the Federal Circuit’s previous two-part test, both of which had required a showing by clear and convincing evidence. The Fifth Circuit reasoned that the Octane Fitness approach was further warranted because the text of § 1117(a) of the Lanham Act is identical to the corresponding text in § 285 of the Patent Act (stating that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party”). In view of the similarity of the statutory language, the Fifth Circuit concluded that Congress intended the language to have the same meaning in both statutes. Accordingly, the Fifth Circuit concluded that an “exceptional” case under the Lanham Act is a case that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.

The applicable standard for a finding of an exceptional case in a trademark case is flexible, similar to the patent context, and defers to the discretion of a district court without requiring a rigid assessment of culpable conduct. An exceptional case need not be established through clear and convincing evidence; only preponderance is required. Going forward, district courts in the Fifth Circuit should address requests to award attorneys’ fees under the Lanham Act on a case-by-case basis that considers the totality of the circumstances.

Practice Note: The Fifth Circuit’s decision to merge Octane Fitness’s definition of “exceptional” into the Lanham Act may make it easier for free speech defenders to retain counsel when sued for the exercise of speech or expression that the party bringing the lawsuit seeks to extinguish (i.e., a SLAPP-type lawsuit) under guise of a Lanham Act action.


TRADEMARK / LANHAM ACT / CERTIFICATION MARKS

Certification Mark May Be Infringed Despite Nominative Fair Use, Lack of Source Confusion


Addressing the use of a certification mark in connection with information systems training, the US Court of Appeals for the Second Circuit reversed and remanded a district court grant of summary judgment for the defendants on the plaintiff’s claims of infringement, false designation of origin and false advertising, and unfair competition, finding that confusion as to sponsorship, affiliation or connection may trump a nominative fair use defense. Int’l Info. Sys. Sec. Certification Consortium, Inc. v. Sec. Univ., LLC, Case No. 14-3456 (2d Cir., May 18, 2016) (Pooler, J.).

International Information Systems Security Certification Consortium (ISC2) owns the certification mark CISSP, meaning Certified Information Systems Security Professional. A certification mark is a mark used by a person other than its owner to certify the quality, accuracy or other characteristics of the associated goods or services.

Security University (SU) offers preparatory classes for ISC2’s CISSP certification exam. In 2010, SU began running advertisements for courses with instructor Clement Dupuis, described as a “master CISSP” or “CISSP master.” After receiving a dissatisfactory response to its cease-and-desist letter, ISC2 filed suit against SU for infringement, false designation of origin and false advertising, and trademark dilution under the Lanham Act, as well as unfair competition under Connecticut state law. ISC2 alleged that SU’s advertisements were likely to confuse or deceive the public by suggesting that ISC2’s CISSP certification could somehow be “mastered,” and by suggesting that SU’s courses “originate with or are sponsored or otherwise approved” by ISC2.

The district court, applying the US Court of Appeals for the Ninth Circuit’s doctrine of nominative fair use and finding no likelihood of confusion as to the source of SU’s services, granted summary judgment in SU’s favor. ISC2 appealed.

The Second Circuit reversed, concluding that the district court had erred in many respects. First, the district court erred in considering only confusion as to source and failing to consider, for example, confusion as to affiliation, sponsorship, endorsement or approval. As the Second Circuit explained, considering only source confusion is particularly problematic in the context of certification marks, which typically do not designate source at all. The district court also erred when it considered only two modes of certification mark infringement: “the use of the mark in a resume of a professional who is in fact not certified by the organization that is the owner of the mark; and the use of the mark on goods that have not in fact been certified.” The Second Circuit explained that a party who has met all the requirements of certification may still infringe a certification mark by using it in such a way that may cause consumer confusion. For instance, although SU instructor Clement Dupuis is a CISSP, consumers may have been misled to believe that he had completed a “master” CISSP certification newly developed by ISC2.

Finally, the Second Circuit explained that the district court erred in applying the Ninth Circuit’s nominative fair use doctrine while failing to consider the Second Circuit’s Polaroid test, which sets out eight factors to be weighed when determining likelihood of consumer confusion. Nominative use is the use of another’s mark to identify the plaintiff’s goods or services, and nominative fair use permits such use under certain circumstances. The Court explained that nominative fair use is not an affirmative defense to infringement, but it found that the doctrine may be helpful.

The Second Circuit remanded the case for the district court to consider the Polaroid factors as well as the nominative fair use factors: “(1) whether the use of the plaintiff’s mark is necessary to describe both the plaintiff’s product or service and the defendant’s product or service, that is whether the product or service is not readily identifiable without use of the mark; (2) whether the defendant uses only so much of the plaintiff’s mark as is necessary to identify the product or service; and (3) whether the defendant did anything that would, in conjunction with the mark, suggest sponsorship or endorsement by the plaintiff holder, that is, whether the defendant’s conduct or language reflects the true or accurate relationship between plaintiff’s and defendant’s products or services.


TRADEMARKS / ACQUIESCENCE

Acquiescence Defense – Don’t Try to Use It Too Early


The US Court of Appeals for the Seventh Circuit reversed and remanded a district court decision, finding that the defendant’s attempt to have a trademark infringement lawsuit dismissed at the pleading stage based on an acquiescence defense was too early, and that the factual underpinnings of the defense required further development. Hyson USA, Inc. v. Hyson 2U, LTD, Case No. 14-3261 (7th Cir., May 16, 2016) (Sykes, J).

Hyson USA suffered a financial setback in 2012 and was forced to suspend operations. The owner of Hyson USA, Leonid Tansky, began working for Karolis Kaminskas, a former employee, at Kaminskas’s newly formed company, Hyson 2U. Hyson 2U operated in much the same way as Hyson USA had operated. Hyson USA transferred to Hyson 2U its branded inventory and equipment, and leased its warehouse space to Hyson 2U.

In 2014, Hyson 2U fired Tansky. Tansky subsequently resumed business at Hyson USA and filed a lawsuit asserting infringement of the “Hyson” trademark by Hyson 2U. The defendant argued that Hyson USA had acquiesced to Hyson 2U’s use of the disputed mark. The district court agreed and dismissed the complaint.

A defense of acquiescence prevents the trademark owner from impliedly permitting another’s use of its mark, then attempting to enjoin that use after the junior user has invested substantial resources to develop the mark’s goodwill. To prove acquiescence, a defendant must establish three elements:

  • The senior user actively represented that it would not assert a right or a claim.
  • The senior user’s delay between the active representation and the assertion of the right or claim was not excusable.
  • The delay caused the defendant undue prejudice.

Applying the test to the dispute, the Seventh Circuit concluded that “Hyson USA’s complaint does not unambiguously establish the affirmative defense of acquiescence.” The Court noted that even though (1) Hyson USA had transferred its branded inventory and equipment to Hyson 2U, (2) Hyson USA knew that Hyson 2U was using its mark, and (3) Tansky worked for Hyson 2U for about 17 months before he was fired, there were “no allegations that Hyson USA or Tansky made any active representations, by word or deed, that they would not assert a right or claim regarding the Hyson trademark.” Because the other two elements of the test cannot support a finding of acquiescence alone, the Court did not discuss those elements.

The Seventh Circuit noted that acquiescence “is not ordinarily susceptible to resolution at the pleading stage. . . . The defense requires a qualitative examination of the parties’ words and conduct and an equitable evaluation of the length of the delay and the degree of prejudice to the defendant if the trademark owner’s rights are enforced,” and “that kind of analysis generally requires a factual record.”


TRADEMARKS / REGISTRABILITY / GENERICNESS

“Churrascos” Is Generic for Restaurant Services


Sarah Bro

On appeal from the Trademark Trial and Appeal Board (TTAB), the US Court of Appeals for the Federal Circuit affirmed the TTAB’s refusal to register a stylized form of the mark CHURRASCOS for restaurant services, finding that the trademark is generic and thus unregistrable. In re: Cordua Restaurants, Inc., Case No. 15-1432 (Fed. Cir, May 13, 2016) (Dyk, J).

Since 1988, Cordua has operated the Churrascos chain of restaurants in Texas. The restaurants serve South American cuisine, including churrasco-style grilled meats. In 2008, Cordua obtained a US trademark registration for the word mark CHURRASCOS in connection with restaurant and bar services. However, when Cordua applied for a stylized version of the CHURRASCOS mark in 2011, the trademark examiner rejected the application on grounds that the mark is generic for Cordua’s restaurant services, since the word “churrascos” simply identifies a type of restaurant and the food it serves.

Cordua appealed the trademark examiner’s decision to the TTAB, which affirmed that the word “churrascos” is generic for a type of cooked meat and therefore “a generic term for a restaurant featuring churrasco steaks.” Furthermore, the TTAB confirmed that Cordua’s earlier registration for the CHURRASCOS word mark had no bearing on the 2011 application for the stylized version of the mark. Cordua appealed.

As a preliminary matter, the Federal Circuit confirmed that Cordua’s existing registration for the CHURRASCOS word mark does not preclude a finding that a later stylized version of the mark is generic, and that the presumption of validity does not carry over from registration of an older mark to a new application for the mark. The Federal Circuit then outlined the two-step Ginn test for assessing whether a mark is generic. The first question requires a determination of the genus of goods or services at issue. The second question looks at whether the relevant public would understand the term in question as referring to that genus of goods or services.

Turning to the issue of whether the TTAB properly determined that the stylized form of CHURRASCOS is generic, the Federal Circuit addressed the first Ginn question and found that the TTAB correctly defined the genus of services at issue to be “restaurant services.” Next, the Court addressed the second Ginn question as to whether the term “churrascos” is generic for restaurant services, and concluded that the TTAB’s decision was supported by substantial evidence. In particular, the Court noted that the TTAB cited to English-language dictionaries and other sources that define “churrasco” as grilled meat.

Cordua argued that while “churrasco” refers to a style of grilling meat, it does not refer to restaurant services. However, the Federal Circuit cited its decision in 1800Mattress.com, in which the Court found MATTRESS.COM to be generic for online retail services in the field of mattresses and beds, because the term “mattress” identified a key aspect of the retail services. Here, the Court noted that there is substantial evidence in the record to show that “churrascos” refers to a key aspect of a class of restaurants referred to by consumers and competitors in the field as “churrasco restaurants.” Thus, the Court held that the TTAB did not err in concluding that the stylized CHURRASCOS trademark is generic as applied to restaurant services, and affirmed.


Copyrights

COPYRIGHTS / § 505

COPYRIGHTS / DMCA

Examiner.com Sails to Victory in DMCA Safe Harbor


Mary Hallerman

Addressing whether the owner of a media website could invoke the safe harbor provision of the Digital Millennium Copyright Act (DMCA), the US Court of Appeals for the 10th Circuit affirmed the district court’s grant of summary judgment in favor of the owner of Examiner.com, noting that the defendant, an internet service provider (ISP), did not have actual or circumstantial knowledge of the plaintiff’s photographs that were posted to its website by independent contractors. BWP Media USA, Inc. v. Clarity Digital Group, L.L.C., Case No. 15-1154 (10th Cir., Apr. 25, 2016) (Kelly, J).

Examiner.com is a news and entertainment website that uses independent contractors to write articles and generate content. BWP Media USA, the owner of rights in certain celebrity photographs, sued AXS Digital Media Group for copyright infringement and related claims because Examiner.com’s independent contractors had posted several of BWP’s photographs without BWP’s permission. AXS Digital Media Group asserted that the DMCA’s safe harbor provision shielded it from liability.

DMCA’s safe harbor provision (17 USC § 512(c)) protects ISPs from monetary liability for copyright infringement that occurs through the use of their service and limits the injunctive relief that may be awarded against ISPs. For the provision to apply, an ISP must demonstrate that the infringing content was stored “at the direction of a user.”

On appeal, BWP contended that Examiner.com’s independent contractors were not “users” under the DMCA safe harbor. The 10th Circuit was not persuaded. The Court found that the plain meaning of “user” in § 512(c) is “a person or entity who avails itself of the service provider’s system or network to store material,” and found that the independent contractors of Examiner.com fit this definition.

BWP also failed to convince the 10th Circuit that the infringing content had been stored at the direction of AXS Digital Media Group, which would render § 512(c) inapplicable. BWP argued that, by telling its independent contractors what to write about for Examiner.com, AXS Digital Media Group had somehow directed its independent contractors to infringe. The 10th Circuit found that these general instructions fell far short of evidence from which a reasonable trier of fact could find that AXS Digital Media Group had directed the infringement.

The Court further found that AXS Digital Media Group met the other requirements to qualify for protection under the DMCA safe harbor—namely, that AXS Digital Media did not have actual or circumstantial knowledge that the photographs posted on Examiner.com were infringing.


COPYRIGHTS / TERMINATION

Brumley Heirs Win Fight over Rights to Old Gospel Song *WEB ONLY**


Jodi Benassi

Addressing the termination right given to authors and their heirs under the Copyright Act, the US Court of Appeals for the Sixth Circuit concluded that four siblings could use their right to terminate the transfer their parents made to their brother. Jackson Brumley, et al. v. Albert Brumley & Sons, Inc., et al., Case No. 15-5429 (6th Cir., May 16, 2016) (Sutton, J).

In the late 1920s, Albert Brumley composed the song “I’ll Fly Away” and sold it to a music publishing company, which copyrighted the song in 1932. Brumley later purchased the company, regained the rights to his song and started his own music publishing company, Albert E. Brumley & Sons. In 1975, Brumley and his wife, Goldie, sold Brumley & Sons to their two sons, Robert and William, assigning them full right, title and interest in the song. Albert died in 1977. Robert and William executed a new contract with Goldie in 1979, in which she assigned and transferred all rights to obtain renewals or copyrights in Albert’s works in the future to Brumley & Sons. In 1986, Robert bought out his brother’s interest, becoming the sole owner of the copyright. Goldie died in 1988.

In 2008, four of Albert’s six children served a termination notice on their brother to cut off Robert’s exclusive rights to the copyright and permit all of the siblings to equally share in the rights to “I’ll Fly Away.” The notice was promptly recorded with the US Copyright Office. The four siblings then filed a lawsuit against Robert and Brumley & Sons seeking a declaration that their termination notice was effective. Robert asserted two defenses: (1) Albert’s song was a “work made for hire,” which is ineligible for termination under 17 USC § 304(c), and (2) Goldie relinquished any termination rights in the 1979 assignment to Robert and William.

The district court ruled as a matter of law that Goldie did not extinguish the family’s termination rights in 1979. The jury ruled in favor of the four siblings on the question of a “work-for-hire.” Robert appealed.

The Sixth Circuit reversed and ordered a new trial. The second trial also resulted in a verdict for the four siblings. Robert appealed again, contesting the district court’s interpretation of the 1979 assignment.

This time the Sixth Circuit affirmed the lower court’s ruling. The Copyright Act of 1976 contains a termination provision that permits an author or his or her successors to undo an earlier grant of the author’s copyright, providing the author and successors the chance to reclaim all interests in the copyright. Section 304(c) embodies two key provisions. First, the termination right survives the author’s death, so long as the author never exercised the right. Second, agreements predating 1978 that purport to bargain away all rights in a work may not limit the termination right.

The outcome of this case hinged on contract interpretation. On appeal, the key issue was the meaning of the 1979 assignment by Goldie. The Sixth Circuit agreed with the district court that the 1979 agreement did not transfer Goldie’s termination rights. The Copyright Act requires that a termination notice state the effective date of the termination and be recorded in the Copyright Office. Goldie’s 1979 assignment did neither of these. Moreover, even if Goldie had executed a compliant notice, she lacked the right to terminate on her own. She held a 50 percent interest in the termination right, and when Albert died, her children held the other 50 percent. The act provides that in order to exercise termination rights, a person must have a total of more than one-half of the termination interest. Thus, Goldie was unable to terminate the 1975 grant in 1979 without at least one of her children joining.

The Sixth Circuit ruled that the Brumley heirs’ termination notice was effective, and each of the six siblings owns an equal share of “I’ll Fly Away.”


Trade Secrets

TRADE SECRETS / DTSA

The New Federalization of Trade Secret Law – What You Should Know About the DTSA


On May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) officially became law, creating for the first time a federal private civil cause of action for misappropriation of trade secrets. The DTSA is actually an amendment to the Economic Espionage Act, which was passed 20 years ago and provides for criminal prosecution of trade secret theft.

Prior to the DTSA, civil actions for trade secret misappropriation were governed solely by state law. Over the years, 48 out of 50 states have adopted some form of the Uniform Trade Secrets Act (UTSA). The two exceptions are Massachusetts, which adopted its own trade secret statute distinct from the UTSA, and New York, which has relied on common law alone.

Many viewed this state-by-state approach as inadequate. The application of state-specific nuances in the law led to unpredictability, and the lack of federal law governing conduct that increasingly involved interstate or foreign activities caused jurisdictional and choice-of-law issues, including concerns that US companies had insufficient recourse against trade secret thieves operating overseas. In such cases, access to federal courts was not automatic. Such access required either diversity of citizenship or supplemental jurisdiction based on another asserted claim arising under federal law.

In view of these concerns, Congress has proposed various federal trade secrets bills over the past several years. Finally, with broad bipartisan support, the DTSA passed in spring 2016.

Importantly, the DTSA does not preempt state trade secret misappropriation laws. Parties may still pursue claims based on state law. But in cases with a nexus to interstate commerce, plaintiffs also will have access to the new federal statutory regime. Some parties have argued that having access to both state and federal causes of action may actually create complexity rather than engendering a more harmonized body of law, but that remains to be seen. Based on the substantial overlap in the DTSA’s and the UTSA’s definitions of “trade secret” and “misappropriation,” one might expect that DTSA and UTSA claims in the same case will not differ much from a substantive perspective. Likewise, DTSA remedies are similar to UTSA remedies: injunctive relief, compensatory damages (in the form of actual damages, unjust enrichment or reasonable royalties), enhanced damages for willful and malicious misappropriation (capped at two times compensatory damages) and attorneys’ fees (in cases involving bad faith or willful and malicious conduct). Nonetheless, there are differences between the DTSA and the UTSA, and having a new federal cause of action available should compel plaintiffs to weigh carefully which claim or claims to pursue, and where to file such claim.

A key feature of the DTSA that has received significant attention is the ex parte seizure provision, 18 USC § 1836(b)(2), which is a new remedy not available under state versions of the UTSA, although UTSA plaintiffs may have had similar vehicles of relief, such as a temporary restraining order. Under the DTSA, per a plaintiff’s expedited, unilateral request, courts may order law enforcement to seize property “necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” This procedure is intended only for emergency situations to prevent or mitigate immediate and irreparable injury when less severe procedures would be ineffective. Indeed, this provision requires “extraordinary circumstances” and, if abused, can result in damages against the seizing party. To that end, the movant must post a bond sufficient to cover such damages if the seizure was unwarranted.

In addition, satisfying the threshold requirements for an ex parte seizure is not easy. A plaintiff must prove that the defendant actually possesses the misappropriated information and must identify “with reasonable particularity” the property to be seized and its location. Once seized, that property remains safeguarded by the court pending an expedited hearing on the propriety of the seizure.

Another key aspect of the DTSA remedies provision is the inclusion of employee mobility protections similar to protections in states that reject the “inevitable disclosure” doctrine. Section 1836(b)(3)(A)(i) restricts injunctive relief that would “prevent a person from entering into an employment relationship,” requiring that such relief be “based on evidence of threatened misappropriation and not merely on the information the person knows.” Notably, the law explicitly seeks to avoid conflicts with existing state employment laws—an area where disputes are expected to arise given that the DTSA is likely to be asserted against former employees.

Yet another employee protection of the DTSA is the immunity provided to whistleblowers who might disclose confidential information when reporting unlawful activities to government officials or as part of an anti-retaliation lawsuit. Under § 1833(b), employers are required to provide notice to employees of this immunity protection in any agreement governing the use of trade secret or other confidential information. As a result, it is important for companies to review and, if necessary, modify their standard employment and non-disclosure agreements to bring them into compliance with the DTSA.

The DTSA is silent on whether the plaintiff must first identify its asserted trade secrets with reasonable particularity before conducting any discovery. This is a fundamental statutory protection for defendants in certain states, such as California. Federal courts have grappled with whether this provision (Cal. Civ. P. Code § 2019.210) is applicable in federal cases under the Erie doctrine.

The DTSA recognizes the great economic harm inflicted on US businesses by theft of trade secrets, particularly by overseas entities. The law requires the US Attorney General and other agencies to report to Congress (within the next year and biannually thereafter) on the breadth and extent of this threat, as well as on any hurdles preventing trade secret owners from avoiding misappropriation by foreign actors and recommendations for further reducing the threat. At a time when many innovators are carefully evaluating whether to guard their intellectual property as trade secrets or patents (particularly in view of legal developments that have invalidated many patents), this new law signals that trade secret protection in the United States is becoming more muscular.


TRADE SECRETS / FEDERAL JURISDICTION

No Waiver of Forum Selection Clause Despite Filing Declaratory Judgment Action in Non-Selected Forum **WEB ONLY**


Addressing waiver of a contractual forum selection clause, the US Court of Appeals for the Fifth Circuit affirmed a lower court’s enforcement of the clause and subsequent dismissal of a trade secrets case, finding that the filing of a declaratory judgment action in a non-selected forum did not waive the party’s right to enforce the forum-selection clause. Wellogix, Inc. v. SAP America, Inc. et al., Case No. 15-20184 (5th Cir., May 12, 2016) (per curium) (non-precedential).

Wellogix and SAP entered into a license agreement to integrate the two companies’ purchase-to-pay software functionalities for the oil and gas industry. The agreement governed the confidentiality of Wellogix’s trade secrets and included a forum selection clause, which specified Germany as “[t]he place of jurisdiction for all disputes arising between the parties out of or in connection with [the agreement].”

According to Wellogix, shortly after entering into the agreement, SAP misappropriated Wellogix’s confidential technology and used it to perform work under agreements with SAP’s other business partners and customers. Wellogix consequently filed a trade secrets theft claim against SAP in Texas state court, which was removed to the US District Court for the Southern District of Texas. The district court dismissed Wellogix’s trade secret claims for forum non conveniens, holding that the forum selection clause of the license agreement was mandatory and enforceable, and all of Wellogix’s claims against SAP were properly decided in Germany.

Several years later, SAP filed a complaint for declaratory relief against Wellogix in the same district, seeking a declaration of non-infringement and invalidity of five of Wellogix’s patents. Wellogix responded with counterclaims for patent infringement and, again, trade secrets theft. SAP moved for summary judgment to dismiss Wellogix’s trade secrets claims based on the forum selection clause. The Southern District of Texas again enforced the clause and granted dismissal for forum non conveniens.

Unsatisfied with this ruling, Wellogix filed a post-judgment motion arguing, for the first time, that diversity jurisdiction did not exist. The district court concluded that Wellogix had litigated “without breathing any jurisdictional doubts” and thus it retained supplemental jurisdiction to affirm the dismissal. Wellogix appealed to the Fifth Circuit, arguing that the district court lacked supplemental jurisdiction and, alternatively, that SAP waived its right under the forum selection clause by filing the declaratory relief action.

The Fifth Circuit found neither of Wellogix’s arguments persuasive. First, a federal court may dismiss a case for forum non conveniens without having to resolve any threshold jurisdictional issues where a foreign tribunal is “plainly the more suitable arbiter of the merits of the case.” The district court thus did not abuse its discretion by enforcing the forum selection clause. Second, under both federal and Texas state law, SAP’s declaratory relief action did not waive the clause either intentionally or by litigating contrary to the clause to prejudice Wellogix. SAP had consistently asserted and successfully enforced the clause in prior litigation with Wellogix. Further, while a party may waive its rights if it substantially invokes the judicial process in aspersion of a forum selection clause, causing detriment or prejudice to the other party, such facts were not before the Fifth Circuit. Indeed, SAP’s declaratory relief action was necessitated by Wellogix’s threat of infringement litigation in the Southern District of Texas. Moreover, Wellogix did not provide argument that any of SAP’s subjective or objective conduct satisfied the waiver standard, and neither did it allege any prejudice.