Post-Alice Federal Circuit Finds Internet Advertising Method Not Patent Eligible
Citing to the Supreme Court of the United States decision of last spring in Alice Corp. v. CLS Bank, the U.S. Court of Appeals for the Federal Circuit has reversed itself and concluded that a claimed method for distributing online media to consumers by having the consumer first watch a paid advertisement is an abstract idea and not patent-eligible subject matter under 35 U.S.C. § 101. Ultramercial, LLC v. Hulu, LLC, Case No. 10-1544 (Fed. Cir., June 21, 2013) (Lourie, J.) (Mayer, J., concurring). This is the third time this case has been before the Federal Circuit.
Ultramercial obtained a patent claiming a method of distributing copyrighted products over the internet. The patented method permits a consumer to receive a copyrighted product for free in exchange for viewing an advertisement, where the advertiser pays for the copyrighted content. After Ultramercial sued Hulu, YouTube and WildTangent for infringement of its patent, the district court, citing Bilski granted WildTangent’s motion to dismiss on the basis that the patent did not claim patent-eligible subject matter but only an abstract idea.
Ultramercial appealed, and the Federal Circuit reversed the district court, finding the claims were patent eligible. (Ultramercial I). In response, WildTangent filed a petition for a writ of certiorari to the Supreme Court. Soon after the Supreme Court issued its decision in Mayo Collaborative Services v. Prometheus Laboratories, it vacated the Federal Circuit’s decision in Ultramercial I, and remanded the case to the Federal Circuit for further consideration in light of its Mayo Collaborative decision. On remand, the Federal Circuit again found that the patent claimed patent-eligible subject matter. (Ultramercial II) (IP Update, Vol. 16, No. 7). In doing so, the Federal Circuit explained that the asserted claims put meaningful limitations on the abstract idea of using advertising as a form of currency, specifically that the steps of the method require intricate and complex computer programming, and several steps require that the method be performed through computers, on the internet and in a cyber-market environment. The Court found that this application of the abstract idea overcomes the technical problem that viewers of copyrighted material could ignore banner ads or skip over advertising before accessing the copyrighted material.
In response, WildTangent filed another petition to the Supreme Court. Soon after the Supreme Court issued its decision in Alice Corp. v. CLS Bank International (IP Update, Vol. 17, No. 7), it vacated the Federal Circuit in Ultramercial II and again remanded the case to the Federal Circuit for further consideration, this time in light of its decision in Alice Corp.
In Alice Corp. the Supreme Court explained that while computer-implemented inventions, such as computer software, may be eligible subject matter for patent protection, the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention. To be patent eligible, the claims must recite additional features or steps that are more than “well-understood, routine, conventional activities” to avoid the danger that a claim to a computer-implemented invention will effectively monopolize an abstract idea. The Supreme Court explained that the framework, provided in Mayo, for distinguishing patents that claim laws of nature, natural phenomena and abstract ideas from those that claim patent-eligible applications of those concepts applies as well to situations such as that presented in Alice Corp. First, a court must determine whether the claims at issue are directed to one of those patent-ineligible concepts, and if so, the court next considers the elements of each claim, individually and as an ordered combination, to determine whether it recites additional elements that transform the nature of the claim into a patent-eligible application.
In Ultramercial III, the Federal Circuit reversed itself and found that under the Alice Corp., the challenged claims were not directed to patent-eligible subject matter because they did not add anything inventive to the claimed abstract idea of using advertisement as an exchange or currency.
First, the Federal Circuit explained that the claims were directed to the abstract idea of using advertisement as an exchange or currency. In doing so the Court considered the claims and concluded they did not recite any concrete or tangible form or application to avoid the “abstract idea” characterization. The Court explained that although certain limitations, such as consulting an activity log, added a degree of particularity, the concept embodied by the majority of the limitations describes only the abstract idea of showing an advertisement before delivering free copyrighted content. Notably, the Federal Circuit explicitly stated that it was not holding that all claims in software-based patents will necessarily be directed to an abstract idea, but that, in this case, they were.
Turning to the second step of the test, the Federal Circuit found that the claims did not contain an inventive concept that transformed the claimed abstract idea into patent-eligible subject matter. Rather, the claims merely instructed the practitioner to implement the abstract idea using routine, conventional activity. The Court noted that the majority of the claimed steps were directed to the abstract idea itself, and that the few additional steps were routine, such as updating an activity log or requiring a request from the consumer to view an advertisement. The Court described the activity log step as an insignificant data-gathering step, thus adding nothing of practical significance to the underlying abstract idea.
Contrary to its Ultramercial II opinion (IP Update, Vol. 16, No. 7), the Federal Circuit here found that the claims’ invocation of the internet did not add an inventive concept. Rather, the Court explained that reciting the internet as the opening environment, to arguably limit the use of the abstract idea to a particular technological environment, was insufficient to save the claims.
Judge Mayer, who replaced Chief Judge Rader on the panel after Judge Rader left the bench in June 2014, issued a concurrence where he agreed with the judgment of the panel but wrote separately to emphasize three points.
First, Judge Mayer wrote that whether a claim meets the requirements of § 101 is a threshold question, one that must be addressed at the outset of litigation. He reasoned that deciding patent eligibility at the beginning of the case is the most efficient for the parties and the courts. This concurrence stands in apparent opposition to the panel decision in Ultramercial II, where the panel noted that finding a patent invalid under § 101 based on a Fed. R. Civ. P. 12(b)(6) motion to dismiss should be the exception, not the norm, reasoning that even though compliance with § 101 is a question of law, it is one that will often be intertwined with questions of fact.
Second (and also in apparent opposition to Ultramercial II), Judge Mayer wrote that there should be no presumption of eligibility with respect to the § 101 inquiry.
Third, Judge Mayer wrote that Alice Corp., for all intents and purposes, set out a technological arts test for patent eligibility. Judge Mayer suggested a rule that claims are impermissibly abstract if they are directed to an entrepreneurial objective, such as methods for increasing revenue, minimizing economic risk or structuring commercial transactions, rather than a technological one.
Patent Co-Owners Are Necessary Parties to Infringement Suits, but Cannot Ordinarily Be Involuntarily Joined
Joseph Speyer, PhD
In a divided opinion addressing whether a patent co-owner has a substantive right not to join in an infringement suit, the U.S. Court of Appeals for the Federal Circuit denied a petition for rehearing en banc, leaving in place a panel decision affirming a district court’s dismissal of a patent co-owner’s suit for lack of standing when a fellow co-owner refused to voluntarily join in the suit. STC.UNM v. Intel Corp., Case No. 13-1241 (Sept. 17, 2014) (per curiam) (Dyk, J., concurring) (Newman, J., dissenting) (O’Malley, J., dissenting).
The plaintiff-appellant STC.UNM sued Intel for patent infringement. During the litigation, non-party Sandia Corp. was found to be a co-owner of the asserted patent. Sandia refused to join in the litigation, and the district court granted Intel’s motion to dismiss based on STC.UNM’s lack of standing, finding that, as a co-owner, Sandia had the substantive right to block STC.UNM’s infringement action by refusing to voluntarily join the suit, despite STC.UNM’s motion to join Sandia as a necessary party under Rule 19(a).
A divided Federal Circuit panel affirmed the district court (IP Update, Vol. 17, No. 7). The Court in the panel ruling first noted that rules of procedure, such as Rule 19(a), cannot abridge, enlarge or modify any substantive right. The panel found that “the right of a patent co-owner to impede an infringement suit brought by another co-owner is a substantive right that trumps the procedural rule for involuntary joinder under Rule 19(a).”
The Federal Circuit has now denied STC.UNM’s petition for rehearing en banc 6–4 with a concurrence and two dissents. In the concurrence, Judge Dyk explained that Rule 19 presupposes a substantive entitlement to relief that was not present here, because STC.UNM can only assert its right jointly, not unilaterally. In addition, Sandia lacked any substantive obligation, such as a contractual agreement, to join in the suit, a prerequisite to involuntary joinder under Rule 19(a). Finally, Judge Dyk explained that 35 U.S.C. § 262 provides a foundation for the conclusion that an individual co-owner has a substantive right not to be involuntarily joined in an infringement suit.
In dissent, Judge Newman stressed the constitutional, statutory and common law principles violated by the Federal Circuit’s holding. Constitutionally, there should be the highest presumption of access to the courts. Statutorily, the Federal Rules mandate that a necessary party must be joined when feasible. Under common law, the “all co-owners rule” flows from the common law to protect defendants from multiple suits for infringement. In her dissent, Judge O’Malley traced the origins of the panel majority’s holding, finding that “repeated references to unsupported dicta have morphed into a hard and fast rule.”
Practice Note: Practitioners may consider including express provisions requiring participation in litigation when drafting joint research agreements.
Patents / Claim Construction / Claim Differentiation
Claim Differentiation Fails to Save Patentees from Their Own Words
In each of two essentially contemporaneous decisions, the U.S. Court of Appeals for the Federal Circuit rejected the patentee’s contentions on appeal that claim differentiation supported a broader construction than found by the district court. CardSoft, LLC v. Verifone, Inc., Case No. 14-1135 (Fed. Cir., Oct. 17, 2014) (Hughes, J.); World Class Technology Corp. v. Ormco Corp. Case No. 13-1679; 14-1692 (Fed. Cir., Oct. 20, 2014) (Taranto, J.) These decisions reflect the limits of claim differentiation as a canon of claim construction.
CardSoft concerned two patents directed to software for controlling specialized computer systems such as payment terminals that include both hardware and software components. According to the patent specification, the invention sought to solve the need to specifically write application programs for the myriad of existing hardware/software architectures. Rather, the specification described an improvement on the existing concept of “virtual machine” by adding a “virtual message processor” to optimize the communication between the application program and the payment terminal’s underlying hardware and operating system. During the prosecution, the applicant confirmed that this was his invention, stating that the claimed invention was “an addition to a conventional virtual machine,” not a wholly new structure. The “convention” being Java’s “write once, run anywhere” virtual machine.
At the district court, the disputed claim term “virtual machine” was construed to not be limited to running applications independent of any operating system or hardware since similar limitations were found in dependent claims. After a jury, applying the district court’s claim construction, found infringement, Verifone appealed.
The Federal Circuit reversed the district court’s construction of the dispute term, finding the construction did not reflect the ordinary and conventional meaning of “virtual machine” because it conflated the claimed “virtual machine” with the applications written to run on the virtual machine. In other words, the Court found that the district court erred by not requiring the claimed “virtual machine” to be limited to the situation where the applications it runs are not dependent on any specific underlying operating system or hardware because these applications are written to communicate with the virtual machine, not the underlying architectures.
In World Class Technology, the Federal Circuit upheld a district court judgment of non-infringement of Ormco’s patent for a bracket for orthodontic braces structured to reduce gum contact or discomfort, a problem with the prior-art brackets. The representative claim of the asserted patent disclosed “the bracket body including a support surface, a ledge, and an archwire slot . . .” that allowed the slide, when moving from a slot-closed to slot-open position, to move at an angle away from the gums. The heart of the dispute was the construction of the term “support surface” and limitations on its movement during the movement of the movable slide. The defendant argued that “support surface” required the surface to also play a slide-supporting role as the slide moved from the slot-open to the slot-closed position. The patentee argued that because a dependent claim explicitly limits the support surface as “engaging” one portion of the slide when it is in the closed position, there is no requirement that the support surface play a supporting role during the movement into the closed position.
Over the patentee’s objection that under the doctrine of claim differentiation the independent claim should not be limited to requiring the “support surface” to support and guide the slide during “translation,” the district court adopted the narrower construction. After the parties stipulated to non-infringement under the district court’s construction, Ormco appealed.
Noting the ambiguity in the claim and finding it unanswered by the claim itself, the Federal Circuit reasoned, “[t]he construction that stays true to the claim language and most naturally aligns with the patent’s description of the invention will be, in the end, the correct construction.” Unfortunately for the patentee, the specification identified gum avoidance as the sole purpose of the claimed invention. The Federal Circuit thus concluded that the broad construction urged by the patentee would not serve that purpose if it were to cover the allegedly infringing arrangement.
With regard to patentee’s claim differentiation argument, the Federal Circuit noted that the correct constructions of the independent claim did not make it “of the same scope” as the dependent claim referenced by patentee and that, “[i]n any event, the specification firmly establishes the requirement of slide support . . .” as a limitation on the invention.
In both CardSoft and World Class Technology, the Federal Circuit rejected the arguments that claim differentiation created a presumption for a broader construction. In CardSoft, the Federal Circuit found the ordinary meaning of “virtual machine” clear in light of the specification and prosecution history such that claim differentiation would not change its meaning. Unfortunately, the patentee failed to argue infringement under the narrower construction, waiving any chance to make a showing on remand compelling the court to grant judgment as a matter of law of non-infringement. In World Class Technology, the Federal Circuit rejected the patentee’s argument that a dependent claim added the limitations that would have covered the allegedly infringing orthodontic arrangement because the adopted construction of “support surface” did not give claim one the same scope as the dependent claim, giving the dependent claim “independent significance.”
Practice Note: During prosecution, claiming a singular purpose for a claimed invention may preclude a construction that does not completely align with the description of the invention.
Patents / Claim Indefiniteness
Corresponding Structure Required to Avoid Indefiniteness
In the context of addressing claim indefiniteness under § 112, ¶ 2, for lack of disclosure correspondence to a means plus function claim element (under § 112, ¶ 6) the U.S. Court of Appeals for the Federal Circuit affirmed the district court, concluding the claim terms “program recognition device” and “program loading device” are means-plus-function elements lacking the requisite corresponding structures in the specification. Robert Bosch, LLC v. Snap-On, Inc., Case No. 14-1040 (Fed. Cir., Oct. 14, 2014) (Prost, J.).
Bosch owns a patent directed to a diagnostic tester that determines whether a computerized control unit in a motor vehicle needs to be reprogrammed. The single independent claim called for a “program recognition device” and a “program loading device,” the only terms at issue. According to the claim, a program version within the control unit is queried and recognized “by means of” the program recognition device. If the program is recognized and found to be out of date, the latest and most current version is loaded by the program loading device. The specification contained no figures or descriptions of either of these devices.
In the ensuing litigation, after Bosch sued Snap-On for patent infringement, Snap-On asserted that the disputed terms were means-plus-function terms under § 112, ¶ 6 and were indefinite because the specification lacked disclosure of corresponding structure. The district court concluded a rebuttable presumption that the term “program recognition device” invoked § 112, ¶ 6 based on the presence of the phrase “by means of” in the claim. The district court found that this presumption was not overcome and that the term was indefinite for failure to disclose corresponding structure. For the term “program loading device,” the court started from a presumption that the term did not invoke § 112, ¶ 6 (based on the lack of the word “means”) but still concluded it was a § 112, ¶ 6 claim element and indefinite. The parties stipulated to a final judgment of invalidity, and this appeal followed.
The Federal Circuit found that the district court erred in applying the presumption that “program recognition device” is a means-plus-function term. The Court indicated that when first reciting the term, the claim does not use the word “means” at all, much less the classic phrase “means for.” The Court also indicated it was not aware of any precedent stating that the presumption is triggered by a claim’s use of the expression “by means of.” It was noted that in past Federal Circuit decisions, the presumption was applied when a claim used the word “means” as a noun, such as a “means” for doing something.
However, the Federal Circuit found that the district court’s error was harmless, since even though Bosch was entitled to a presumption against means-plus-function claiming, the terms “program recognition device” and “program loading device” still invoke § 112, ¶ 6. According to the Court, “[t]he claim terms, construed in light of the specification, fail to provide sufficiently definite structure to one of skill in the art.” In its finding of a lack of structure, the Court noted its previous decision that the word “device” is a non-structural, “nonce” word, and that the other words do nothing more than identify functions for the “device” to perform. Here, the specification only included functional descriptions with no mention of what the devices consist of or any “structural guidance.”
Bosch relied on Inventio in trying to avoid invoking § 112, ¶ 6, since in that case the Federal Circuit found the term “modernizing device” fell outside § 112, ¶ 6. The Court distinguished Inventio, noting that in that case there was “extensive structural description in the intrinsic record.” Bosch also relied on its expert witness, who asserted that the two claim terms were generally understood to have structural meanings in the art. The Court was not persuaded, indicating that the expert’s statements were conclusory and simply repeated functions. The Court also stated that merely listing examples of possible structures is insufficient to avoid invoking § 112, ¶ 6.
Patents / § 271(a) Infringement
US-Centered Negotiations for Product Made and Sold Outside United States Do Not Constitute Sale or Offer for Sale in United States
In a case exploring the limits of what constitutes a sale or offer for sale “within the United States” under 35 U.S.C. § 271(a), the U.S. Court of Appeals for the Federal Circuit found that sales were carried out outside of the United States and, even though they were partially negotiated in the United States, did not constitute an infringement of U.S. patent rights under § 271(a). Halo Elecs., Inc. v. Pulse Elecs., Inc. and Pulse Elecs. Corp., Case Nos. 13-1472; -1656 (Fed. Cir., Oct. 22, 2014) (Lourie, J.) (O’Malley, J., and Hughes, J., concurring).
Halo accused Pulse of infringing its patents related to surface mount electronic packages containing transformers for mounting on a printed circuit board. Pulse’s products were manufactured in Asia and the majority of its products were delivered to customers in Asia. Pulse received the purchase orders for these products abroad. However, Pulse engaged in pricing negotiations with its customers in the United States, and Pulse’s U.S.-based employees had to approve prices quoted by its agents when those prices fell beneath a threshold. The district court granted Pulse summary judgment of non-infringement finding that its activities for these sales were insufficient to constitute a sale or offer for sale “within the United States.” After a trial finding that the same products that did enter the United States infringed Halo’s patents, the district court found Pulse’s substantial invalidity defense negated the objective prong of willfulness under In re Seagate. Halo appealed.
On appeal, the Federal Circuit panel affirmed that Pulse’s U.S.-based activities for its products manufactured and sold in Asia were not sales or offers for sale “within the United States.” The Court noted that while a sale is not necessarily limited to the place of transfer of the tangible property, but may also be determined by the place where agreement to such a transfer takes place, extraterritorial applications of U.S. patent law were disfavored. The Court found it was undisputed that the products at issue were manufactured, shipped and delivered abroad; that the purchase orders were received abroad; that the negotiations that occurred in the United States did not constitute a firm agreement to buy and sell; and that Pulse was paid abroad for its products. Based on these facts, the Court found it need not reach Halo’s argument that the place of formation of a contract can be determinative of whether a sale has occurred “within the United States.” The Court further explained that for an offer to sell to constitute infringement, the offer must be to sell a patented invention within the United States, and that Pulse’s actions therefore did not constitute an offer for sale cognizable under the Patent Act. Finally, the panel affirmed the district court’s finding of no willfulness, agreeing that Pulse’s presentation of a substantial invalidity defense at trial negated the objective prong of the willfulness test.
Practice Note: In a concurrence, Judge O’Malley and Judge Hughes, while agreeing with the finding of no willfulness under current case law, urged the full court to reexamine its enhanced damages jurisprudence in light of the Supreme Court of the United States’ decisions in Highmark v. Allcare Health Management Sys. (IP Update, Vol. 17, No. 5) and Octane Fitness v. ICON Health & Fitness, (IP Update, Vol. 17, No. 5). Specifically, the concurrence urged reconsideration of the two-part subjective/objective test required under Seagate; the requirement that willfulness be proven by clear and convincing evidence; whether de novo review is the appropriate standard on appeal; and whether willfulness must be decided by the court as a matter of law.
Patents / Infringement / Prevailing Party / Willfulness
Federal Circuit Addresses Plethora of Issues in Affirming $19.5 Million Damage Award
The U.S. Court of Appeals for the Federal Circuit, in an opinion that broached issues of claim construction, non-infringement, willful infringement, invalidity, the legal implications of a general verdict, evidentiary rulings affecting the awarded damages, the date the patentee was first entitled to prejudgment interest, and the circumstances defining the “prevailing party” for purposes of costs under Federal Rule of Civil Procedure 54(d) and attorney’s fees under 35 U.S.C. § 285, affirmed the district court on all issues except the “prevailing party” issue. SSL Services, LLC v. Citrix, Case No. 13-1419 (Fed. Cir., Oct. 14, 2014) (O’Malley, J.)
SSL Services asserted two patents against Citrix Systems. The two patents met very different fates. The jury found that Citrix’s “GoTo Products” did not infringe the claims of one of the patents but did infringe the claims of the other. SSL appealed.
The Federal Circuit, considering the non-infringement ruling, explained that the district court correctly construed the claim term “destination address” and affirmed. In doing so, the Federal Circuit consulted the text of the claim and the written description—agreeing that the use of “network address” was not limited to IP-based protocols. With the correct claim construction in place, the panel addressed whether the presentation of multiple non-infringement arguments led the jury to reach its non-infringement finding based on an erroneous legal theory. Providing important guidance on the general verdict rule, the Court concluded that SSL had not carried its burden in establishing that the purported error in a construction other than “destination address” could have led to a different outcome. After reviewing the operation of the accused products, and in view of the affirmed claim construction, the Federal Circuit concluded that there were no facts or evidence to support SSL’s liability theory.
Turning to SSL’s other patent in suit and to a different set of accused products, the Federal Circuit agreed that substantial evidence supported the jury’s verdict that the asserted claims were infringed. The Court also affirmed that the asserted claims were not invalid because substantial evidence supported the conclusion that a primary prior art reference did not disclose the pertinent authentication and encryption software referenced in the asserted claims.
In revisiting the district court’s willful infringement determination, i.e., for the SSL patent that was infringed, the Federal Circuit applied its ruling in Bard Peripheral Vascular v. W.L. Gore & Assocs., Inc., (IP Update, Vol. 15, No. 2) to conclude that Citrix acted despite an objectively high likelihood that its actions constituted infringement of a valid patent, and actually knew or should have known that its actions constituted an unjustifiably high risk of infringement of a valid and enforceable patent. Reviewing the “objective prong” de novo, the panel agreed with the district court that Citrix’s alleged defenses of invalidity and non-infringement were not reasonable. In particular, during ex parte reexamination, the U.S. Patent and Trademark Office had rejected Citrix’s invalidity positions under the lower preponderance of the evidence standard and concluded that the expert testimony surrounding the non-infringement position was without merit.
The question of subjective intent, which was submitted to the jury, also failed to stave off the willfulness finding. The evidence demonstrated that Citrix had first learned of the patent in 2000 and was in possession of the relevant technology based on a business relationship with the patentee’s predecessor. While Citrix sought to introduce evidence of a good faith belief in invalidity based on the ongoing reexamination, the district court excluded evidence as to the ongoing reexaminations, and the Federal Circuit did not disturb those discretionary rulings. Because Citrix’s evidence of the good faith belief in non-infringement was also excluded by the district court and affirmed on appeal, the finding of willful infringement and enhanced damages remained intact. SSL was awarded $10 million in infringement damages by the jury as well as $5 million in enhanced damages by the district court for willful infringement, and $4.5 million in prejudgment interest by the district court—calculated from the date of first infringement in 2004.
In assessing which party was the “prevailing party” under Fed. R. of Civ. Pro. 54(d), the Federal Circuit vacated the district court’s finding of “no prevailing party” where “both parties achieved some success and sustained some failure.” The Federal Circuit clarified that although SSL did not prevail on all infringement claims, its success on the one patent had materially altered the legal relationship between the parties so as to entitle the patent holder to a damages award, costs and potential attorney’s fees. The question of whether the prevailing party was entitled to fees under § 285 was remanded with the express reminder that a prevailing party was not automatically entitled to such fees.
Patents / Licenses / Damages
Actual Negotiations Trump 40-Year Georgia-Pacific Test to Determine Type of Patent Licensing Royalties
Addressing a lower court’s reasonable royalty determination that chose not to rely on the Georgia Pacific factors, the U.S. Court of Appeals for the Seventh Circuit recently affirmed the district court’s reasonable royalty determination without discussing the Georgia-Pacific factors at all, instead framing the patent licensing dispute as a matter of contract interpretation and not one of patent law. The Grigoleit Co. v. Whirlpool Corp., Case No. 14-1663 (7th Cir., Oct. 16, 2014) (Easterbrook, J.)
Grigoleit supplies knobs and other components to Whirlpool for use in its washers and dryers. After years of sourcing parts from Grigoleit, Whirlpool removed Grigoleit as its preferred supplier and began sourcing from Phillips Plastic. Grigoleit then informed Whirlpool and Phillips that they allegedly were practicing Grigoleit’s patents directed to a method of assembling appliance knobs.
To resolve the dispute, Grigoleit and Whirlpool entered into a patent licensing agreement. The licensing agreement provided that “Whirlpool shall not be obligated to pay Grigoleit any monies as royalties . . . so long as” Whirlpool continued to purchase from Grigoleit knobs for the “Estate” and “Roper” brand lines of washers and dryers, and Whirlpool continued to give “serious consideration” to Grigoleit for the purchase of its other products.
The licensing agreement was silent as to the appropriate measure of royalties should there be a failure to meet such conditions. For example, the licensing agreement did not include any provisions directed to whether royalties should be paid as running royalties, percentage or fixed-price royalties, or a lump-sum royalty.
Later, Grigoleit sued Whirlpool for breach of the parties’ licensing agreement. Specifically, Grigoleit alleged that Whirlpool failed to give “serious consideration” to its other product lines. Grigoleit demanded damages under a contract theory. Specifically, Grigoleit sought its lost profits that it would have made had Whirlpool purchased its knobs exclusively from Grigoleit.
Whirlpool argued that the appropriate compensation, if any, was not lost profits for breach of contract, but rather a royalty for use of Grigoleit’s patented technology. Whirlpool urged the district court to apply the Georgia-Pacific factors to determine a reasonable royalty and argued that the royalty rate should be a fixed-price royalty of $.01 and $.12 per part sold.
The district court agreed with Whirlpool that the text of the contract provided for royalties instead of lost profits damages under contract law. However, the district court found “no need to resort to the Georgia-Pacific factors to hypothesize negotiations on this issue.” Even though the parties had not reached an actual agreement on a specific type of royalty, the court explained that the parties ultimately entered into a binding agreement. By contrast, the court said, “Georgia-Pacific was a pure patent-infringement case where the parties did not engage in actual negotiations that produced an actual license agreement, necessitating that the court construct hypothetical negotiations to reach a reasonable royalty.”
Furthermore, the court explained that “this is, at its heart, a contract interpretation case.” The court relied on extrinsic evidence of a draft of the parties’ licensing agreement, where Grigoleit had proposed a $.12 per part, or fixed price, royalty. “Based on the extrinsic evidence and the generally accepted measure of royalties,” the court held that the appropriate measure of royalties was a royalty of $.01 and $.12 per part.
In affirming the district court, the Seventh Circuit did not opine on the district court’s decision to not apply the Georgia-Pacific factors. Instead, the Court framed the licensing dispute as one in contract and not patent law. Relying on the text of the licensing agreement, the Court found that “[t]he phrase ‘so long as’ permitted Whirlpool to change how it performed, getting a royalty-free license in some periods and paying royalties in others.” Specifically, the Seventh Circuit read the text of the patent license as providing a royalty-free license, subject to the satisfaction of certain conditions. The failure to satisfy such conditions, the Court explained, meant that “royalties” would be owed. The Court did not opine on how the district court reached a determination that the reasonable royalty specifically ranged from $0.01 to $0.12 per part.
Patents / Contentions / Sanctions
District Courts Should Not Nit-PIC *Web Only*
Addressing the issue of when it is appropriate to issue sanctions for deficient Preliminary Infringement Contentions (PICs) (under state court procedural rules), the U.S. Court of Appeals for the Federal Circuit overturned a district court’s grant of summary judgment based on a party’s refusal to pay the opposing party’s costs and fees. Anti-Cancer, Inc. v. Pfizer, Inc., et al., Case No. 13-1056 (Fed. Cir., Oct., 20, 2014) (Newman J.) The Federal Circuit ruled that because it found no evidence of bad faith and the lower court had failed to explicitly find such, there was no reasonable basis for imposing sanctions under Ninth Circuit law.
Anti-Cancer brought suit against Pfizer over a patent directed to imaging proteins using green fluorescent protein. Under the procedural rules of the District Court for the Southern District of California, Anti-Cancer filed its PICs based entirely on the defendants’ scientific publications, citing to specific portions of the publications as examples of infringement. Anti-Cancer asserted in its filing that the contentions were as crystalized as possible because discovery had not yet begun and reserved the right to supplement its PICs. Defendants filed a motion for summary judgment claiming that the PICs were defective because they did not include an explanation of how each element was infringed. The district court agreed that the PICs failed to connect the dots from the descriptions in the scientific publications to the claim elements or explain how certain technology in the publication related to the technology found in the claims. The district court explained that because Anti-Cancer could explain in its brief opposing summary judgment how a person of skill in the art would understand the publication excerpts to show infringement, it could have included an explanation in the PICs, but chose not to. The court authorized Anti-Cancer to supplement its PICs, but only if it paid the defendants’ attorney fees and costs for their summary judgment motion. When Anti-Cancer objected to the payment, the court entered summary judgment in favor of the defendants. Anti-Cancer appealed.
On appeal, Anti-Cancer argued that the fee-shifting was an unwarranted sanction and that summary judgment on the condition of payment was improper. Relying on Ninth Circuit law, because fee-shifting is part of a court’s inherent authority rather than patent law, the Federal Circuit agreed. Under Ninth Circuit precedent, the court must make an explicit finding of bad faith before awarding sanctions under its inherent powers. Additionally, the local patent rule 3.1 recognizes evidentiary limits by requiring the plaintiff to list evidence “if known” or of which it is “aware.” This indicates that the PICs are intended to be a “guide for discovery” rather than a “forum for litigation of the substantive issues.” PICs need not necessarily include proof or direct evidence of infringement. Because the Federal Circuit found no evidence of bad faith on the part of Anti-Cancer and the district court had not made any explicit finding of bad faith, the district court had exceeded its discretion by imposing sanctions as a condition to supplement Anti-Cancer’s PICs.
Patents / Infringement / Government Liability
Federal Government May Be Liable for Patent Infringement by Private Companies Performing Quasi-Governmental Functions
Addressing the jurisdiction of a patent infringement claim against the U.S. government, the U.S. Court of Appeals for the Federal Circuit affirmed the district court’s dismissal of the plaintiff’s complaint, as the allegedly infringing acts were carried out for the United States under 28 U.S.C § 1498 (a). IRIS Corp. v. Japan Airlines Corp., Case No. 10-1051 (Fed. Cir., Oct. 21, 2014) (Prost, J.) Similarly, the U.S. Court of Appeals for the District of Columbia Circuit addressed the U.S. government’s attempt to require airports indemnify the Transportation Security Administration (TSA) from all liability of intellectual property claims, holding the contract improper. SecurityPoint Holdings, Inc. v. TSA, Case No. 13-1068 (D.C. Cir., Oct. 28, 2014) (Williams, J.)
In IRIS Corp., IRIS sued Japan Airlines (JAL) in district court alleging infringement of its patent covering a method of manufacturing a passport with a RFID chip. IRIS asserted that JAL’s examination of electronic passports made abroad in a manner within the scope of the patented claims infringes the claims of the patent under 35 U.S.C. § 271 (g). JAL responded that U.S. federal law required it to examine the passports, which exempted JAL from infringement liability. JAL further asserted IRIS’s exclusive remedy for patent infringement is an action against the United States under 28 U.S.C § 1498 (a). After the district court granted JAL’s motion, IRIS appealed.
The Federal Circuit affirmed explaining that the United States had assumed liability under § 1498 (a) for JAL’s allegedly infringing activities. First, the Court found that the U.S. government clearly provided its authorization and consent for JAL’s activities, as JAL could not comply with its legal obligations without engaging in the allegedly infringing activities. Second, the Federal Circuit found that the U.S. government benefits from JAL’s allegedly infringing activities, because JAL was required by the government to perform this quasi-governmental function of examining passports to improve detection of fraudulent passports and reduce the demands on government resources.
In the SecurityPoint Holdings case, the petitioner, SecurityPoint, challenged TSA’s changes to a program involving advertisements at airport security checkpoints. In a separate, currently pending case, SecurityPoint sued TSA for allegedly infringing SecurityPoint’s patent covering some of the equipment and methods used by airports for advertising on bins used at airport security checkpoints (the Bin Advertising Program). In response to this pending lawsuit, TSA modified the terms its contracts with airports under the Bin Advertising Program by requiring participating airports to indemnify TSA from all liability for intellectual property claims related to the checkpoint equipment. TSA’s modified contract further provided that, upon cancellation of the agreement, TSA would retain the right to use the checkpoint equipment and obtain a license to all intellectual property necessary for such use. SecurityPoint requested TSA cease and desist from making these contractual changes, asserting airports would not be able to comply with a contract indemnifying TSA from intellectual property claims. After TSA denied SecurityPoint’s request, SecurityPoint appealed to the D.C. Circuit.
The D.C. Circuit held that TSA’s denial of the request failed to provide a brief statement on the grounds for denial. Specifically, TSA failed to respond to SecurityPoint’s arguments that the new indemnification provision would make it impossible for airports to participate in the Bin Advertising Program. Thus, the D.C. Circuit vacated TSA’s decision as arbitrary and capricious.
No En Banc Review for Use of Post Invention Information in Obviousness Analysis *Web Only*
Declining to reconsider its panel decision holding that a pharmaceutical was obvious where a skilled artisan would have altered the lead prior art compound in the same manner suggested by claimed invention, the U.S. Court of Appeals for the Federal Circuit denied en banc review, rejecting the notion that the panel’s ruling had the effect of foreclosing consideration of later-discovered information. Bristol-Myers Squibb Co. v. Teva Pharms USA, Inc., Case No. 13-1306 (Fed. Cir., Oct. 20, 2014) (per curium) (Dyk, J., joined by Wallach, J., concurring in denial of petition for rehearing en banc) (O’Malley, J., concurring in denial of petition for rehearing en banc) (Newman, J., joined by Lourie, J., and Reyna, J., dissenting from denial of petition for rehearing en banc) (Taranto, J., joined by Lourie, J., and Reyna, J., dissenting from denial of petition for rehearing en banc).
Earlier, a unanimous panel of the Federal Circuit upheld a district court’s finding that a lead compound disclosed in the prior art rendered obvious the antiviral compound claimed in the patent-in-suit. IP Update, Vol. 17, No. 7. The Federal Circuit agreed with the district court that evidence discovered after the priority date showing toxicity of the lead compound did not alter the obviousness finding.
In her concurring opinion to the en banc denial, Judge O’Malley rejected the petitioners’ assertions that the panel’s decision foreclosed consideration of later-discovered differences between a claimed compound and the prior art. According to Judge O’Malley, in their obviousness analyses, both the district court and the panel considered the later-discovered toxicity of the claimed compound; they just did not find it convincing. “Ultimately, a case is won or lost on the record.” Ample evidence showed that skilled artisans were treating the prior art compound as a lead compound. Skilled artisans at leading companies were testing and developing it as an antiviral agent. The expert for Bristol-Myers Squibb admitted surprise upon learning after the priority date that the compound was toxic. Moreover, Bristol-Myers Squibb’s expert conceded that a skilled artisan could have been led to modify the lead compound to create the claimed invention.
Judge O’Malley further explained that the petitioners took words out of context when they characterized the original panel’s evaluation of unexpected results, misread the decision as requiring a burden-shifting analysis and mischaracterized the decision to require offsetting of secondary indicia.
Dissenting to the denial of en banc review, Judge Newman contended that the panel did not consider the later-discovered toxicity of the lead compound or the unexpected results raised by petitioners, as required under the law.
Also dissenting in the denial of en banc review, Judge Taranto asserted that the panel’s decision raised questions concerning the proper meaning of “reasonable expectation of success” and “unexpected results” in an obviousness analysis because of the decision’s treatment of the post priority date toxicity data.
Patents / Collateral Estoppel / Patentable Subject Matter
Ineligible Subject Matter in One Court Is Still Ineligible in Another *Web Only*
Addressing the issue of whether the court was bound by another court’s holding that a patent was invalid for being directed to patent-ineligible subject matter, the U.S. District Court for the Eastern District of Texas granted summary judgment of invalidity, determining that collateral estoppel made the asserted patent’s invalidity a foregone conclusion. DietGoal Innovations LLC v. Chipotle Mexican Grill, Inc., Case No. 2:12-cv-764-WCB-RSP (E.D. Tex., Oct. 3, 2014) (Bryson, J., sitting by designation)
DietGoal’s patent related to computerized meal planning. The invention included a computer display that showed food that the user could organize into meals. As the user changed the food in the meal, the computer would show how those food choices related to the user’s eating goals. For example, a user could decide whether to eat a hamburger or a chicken sandwich. The computer display would then show how that decision affected the user’s goals for caloric intake.
Another court had previously found that DietGoal’s patent was directed to patent-ineligible subject matter. That determination was made on summary judgment in a case between DietGoal and an unrelated third party. In the instant case, DietGoal faced a similar summary judgment motion, and the court considered the collateral estoppel effect of the prior ruling.
Although the prior decision had already determined the patent to be invalid, DietGoal argued here that collateral estoppel did not apply because DietGoal had been unable to fully litigate the issue. According to DietGoal, the prior court had “failed to grasp” the technical subject matter of the patent. DietGoal argued that the prior court’s decision was flawed because it did not construe any claim terms. Judge Bryson rejected this argument, noting that DietGoal had failed to specify how construing the claims would have changed the invalidity analysis.
DietGoal also argued that the prior court showed a fundamental misunderstanding of the patent. The prior court had reasoned that the invention could be performed by a human mind using a pen and paper and was therefore directed to ineligible subject matter. DietGoal argued that the invention could not be performed in a human mind because the patent required interaction between a user and a computer screen. Judge Bryson disagreed, concluding that prior court understood the technology well enough, and that DietGoal simply disagreed with the decision. Judge Bryson noted that there is a narrow exception where collateral estoppel may not apply, i.e.,instances in which a court fails demonstrably to understand the technology, but that exception does not cover situations where the patentee simply disagrees with a court’s reasoning.
America Invents Act
AIA / CBM / IPR / Petition / Institution Decision
Getting It Right the First Time
Two recent orders by the U.S. Patent and Trademark Office (USPTO) Patent Trial and Appeal Board (PTAB or Board) emphasize how important it is for a petitioner to get it right the first time. The standard for institution of a covered business method (CBM) review or inter partes review (IPR) is whether the information presented in the petition demonstrates “that it is more likely than not that” a challenged claim is unpatentable. In two recent institution orders, the PTAB clarified when this standard is met in the context of petitions that are based on prior art and/or arguments that may have been previously before the USPTO.
In one case, the PTAB granted institution over the patent owner’s argument that the same or similar prior art was considered in an earlier proceeding. United State Postal Service v. Return Mail, Inc., CBM 2014-00116 (PTAB, Oct. 16, 2014) (Turner, APJ). In another case, the PTAB denied institution based on a corrected petition, noting that the prior art and arguments raised were “substantially the same” as those presented in an earlier (unsuccessful) petition. Conopco, Inc. v. The Proctor & Gamble Co., IPR 2014-00628 (PTAB, Oct. 20, 2014) (Obermann, APJ). In both cases the PTAB noted its statutory mission to conduct proceedings quickly, efficiently and economically.
In the U.S. Postal Service case, the PTAB rejected the patent owner’s argument that the petition should be denied because the same or similar prior art references were submitted in an earlier proceeding. The patent owner argued that “four of the five prior art references that [petitioner] USPS has submitted in this proceeding were submitted and considered by the Office” during a prior reexamination proceeding, and that the petitioner had already tried, unsuccessfully, to invalidate the…patent and should not be permitted to waste more resources trying again. The PTAB took note of the burden on the patent owner and the PTAB to rehear the same or substantially the same prior art or arguments from the prior reexamination but found “sufficient reasons in this proceeding to exercise our discretion to institute a covered business method patent review.” In doing so, the PTAB pointed out that “not all of the art proffered has been considered previously in the reexamination or reissue proceedings,” and that there were “additional grounds that can be considered in a covered business method patent review, as well some . . . that cannot be considered, as compared with the prior reissue or reexamination proceedings.”
In considering the petition in Conopco, the PTAB denied a corrected petition for IPR, finding that it raised similar arguments to an earlier petition. “[B]ased on the particular circumstances presented in this case, we decline to institute review. . . . We have compared the prior art and arguments raised in the instant Petition to those raised in [the earlier] Petition. Based on the information presented, we are persuaded that the instant Petition raises, at minimum, ‘substantially the same . . . arguments’ that ‘previously were presented to the Office’ in the [earlier] Petition. . . . On this record, the interests of fairness, economy, and efficiency support declining review—a result that discourages the filing of a first petition that holds back prior art for use in successive attacks, should the first petition be denied. . . . Based on the circumstances before us, therefore, we exercise our discretion and decline to institute review.”
AIA / IPR / Procedure / Proper Reply
Warning: No Sandbagging Experimental Evidence
The U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) has explained that an inter partes review (IPR) petitioner should fully support its positions in its initial petition and is not entitled to raise new experimental evidence in a reply to a patent owner’s response to the petition. Baxter Healthcare Corp. v. Millenium Biologix, LLC, Case Nos. IPR2013-00582, 00590 (PTAB, Oct. 13, 2014) (Murphy, APJ).
In its petition, Baxter asserted that the challenged claims were inherently anticipated. In response to the petition, the patent owner countered that Baxter had not submitted any experimental evidence to support its inherent anticipation argument. In reply, Baxter filed multiple additional exhibits, including a declaration by an author of one of the prior art references cited by Baxter in connection with its inherent anticipation argument. This declaration provided new experimental evidence that purportedly supported Baxter’s inherent anticipation argument. The patent owner objected, arguing that the experimental evidence was new evidence, belatedly presented. The patent owner added that, if the petitioner had wished to support its inherent anticipation argument with experimental evidence, it had the opportunity—and the obligation—to do so in its initial petition.
The PTAB explained that the Office Patent Trial Practice Guide provides that a reply brief raising new issues or belatedly presenting evidence will not be considered and may be returned. In this case, the PTAB found that the new evidence exceeded the permissible scope of a reply. Although the submission of the new experimental evidence may have been stimulated by arguments made in the patent owner’s response to the petition, the PTAB noted that there was no reason why the petitioner could not have presented the experimental evidence when it initially filed its petition, and that to permit petitioner to do so at such a late stage in the proceedings would impose unfair prejudice on the patent owner and would not serve the interests of justice. Accordingly, the PTAB refused to consider the newly submitted experimental evidence.
Practice Note: Before filing a petition to institute an IPR, petitioners should consider whether any arguments will require support in the form of experimental evidence or declarations. If a petitioner anticipates that the patent owner may undermine its arguments based on a lack of experimental evidence, the petitioner is well advised to present such evidence with its petition. If, more than one month after the trial is instituted, the petitioner concludes that experimental evidence may be necessary (and it was unable to acquire the necessary evidence before filing), the petitioner may request authorization to file supplemental information in support of the petition. This request must explain why the new information could not have been obtained earlier.
AIA / IPR / Claim Construction / Real Party-In-Interest
To Be A Real Party-In-Interest Entity Must Control or Fund the Litigation *Web Only*
In a final written decision of an inter partes review (IPR) determining that the petitioner showed by a preponderance of the evidence that challenged claims were unpatentable, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) canceled all claims under review, rejecting the patent owner’s argument that petitioner failed to identify a real party-in-interest because the patent owner did not show that the alleged real party-in-interest did not exercise control over the litigation. Sipnet EU S.R.O. v. Straight Path IP Group, Inc., Case No. IPR2013-00246 (PTAB, Oct. 9, 2014) (Deshpande, APJ).
The PTAB found claims of the challenged patent invalid, rejecting arguments raised by the patent owner that one of the prior art references was not prior art because it was not publicly available. The PTAB relied on two declarations submitted by the petitioner. The first declarant testified that he saw several Windows NT 3.5 Server packages that included a print copy of the prior art at a time prior to the effective date of the challenged patent. He also testified that the Windows NT 3.5 Server package included a CD version of the reference. The second declarant testified that the print and CD versions of the reference were substantially similar, with the only differences relating to the glossary and formatting. The patent owner had raised similar arguments in a motion to strike, but those arguments were also rejected by the PTAB.
The patent owner also argued that the petitioner was estopped from initiating the proceeding for failure to identify Stalker Software as a real party-in-interest. The petitioner is a reseller of Stalker’s software package that purportedly infringes the patent at issue. The patent owner argued that its predecessor in interest served a complaint on Stalker involving the same patent more than one year before the filing of the IPR. However, the PTAB concluded that the patent owner had failed to demonstrate that Stalker exercised control over the litigation or that Stalker was responsible for funding and directing the proceeding. In other words, the PTAB found that the patent owner failed to prove that Stalker was a real party-in-interest. Rather, the PTAB found that Stalker had only provided the reference used in the IPR to the petitioner, and this action was performed at the request of the petitioner. Accordingly, Stalker was not a real party-in-interest.
No Joinder Without Proof That Grounds Could Not Have Been Raised Previously *Web Only*
Addressing the issue of joinder to an already instituted inter partes review (IPR), the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) denied a petitioner’s motion for joinder of a second petition involving the same parties and patent as previously instituted, finding that petitioner failed to explain why the joinder issues could not have been addressed in the prior petition. Reloaded Games, Inc. v. Parallel Networks LLC, Case No. IPR2014-00950 (PTAB, Oct. 22, 2014) (Jung, APJ).
The petitioner, Reloaded Games, filed a petition to institute IPR of a patent at issue in an already instituted IPR. The petition was filed within one month after the other IPR was instituted and involved the same parties and patent. The second petition was filed more than one year after the petitioner was served with a complaint alleging infringement of the patent. However, the one-year bar under 35 U.S.C. § 315(b) does not apply to a request for joinder. The petitioner argued that its request for joinder was appropriate because the second petition involved the same parties, raised a limited number of additional issues, would not complicate the already instituted IPR and was directed to issues that would already be resolved. The patent owner, Parallel Networks, argued that the petitioner had not raised any ground of unpatentability that could not have been raised when filing the original petition, and that petitioner merely sought a “second bite of the apple.”
The PTAB agreed with the patent owner, explaining, “[j]oinder may be authorized when warranted, but the decision to grant joinder is discretionary. . . . When exercising that discretion, the Board is mindful that patent trial regulations, including the rules for joinder, must be construed to secure the just, speedy, and inexpensive resolution of every proceeding.” After noting that “Petitioner’s Motion for Joinder does not explain why [newly added] citations could not have been added to the prior Petition,” the PTAB concluded that joinder was not justified.
AIA / IPR / Attorney-Client Privilege
PTAB Expands Discovery for Inter Partes Review
In a decision that has the potential to expand the scope of permissible discovery in inter partes reviews (IPRs) as well as other post-grant procedures under the America Invents Act, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) granted a patent owner’s motion to compel production of invoices withheld under a claim of attorney-client privilege. GEA Process Engineering, Inc. v. Steuben Foods, Inc., Case Nos. IPR2014-00041, -00043; -00051; -00054; and -00055 (PTAB, Sept. 12, 2014) (Elluru, APJ).
Petitioner GEA filed five IPR petitions against five related patents owned by Steuben Foods. The claims of the patents related to methods for bottling foodstuffs by aseptically disinfecting or filling bottles with aseptically sterilized foodstuffs at a rate greater than 100 bottles per minute. Parallel reexaminations and reissue proceedings had already been instituted for some of the patents. After institution of the IPRs, the patent owner alleged that GEA had failed to identify all of the necessary real parties in interest. Specifically, the patent owner alleged that GEA’s sister company in Italy, Procomac, was a real party in interest to the proceedings, and that because of the failure to identify this necessary real party in interest, a statutory requirement, the IPR petitions should not have been accorded a filing date.
The patent owner contended that GEA and its sister company “act in unison for all purposes concerning the aseptic filling technology at issue in these review proceedings and in the copending district court litigation as reflected in various court filings” as well as the petitioner’s website. Steuben Foods also alleged that Nestlé USA was a real party in interest, because it was supposedly jointly and severally liable with Procomac for majority of the alleged infringements of the Steuben patents. Central to the patent owner’s argument was the allegation that Procomac was the manufacturer of the accused devices in the related litigation and that it bore the “vast majority of the liability for infringing the patents under review,” and that Procomac had manufactured the seven allegedly infringing machines at issue in the related litigation. According to Steuben Foods, Procomac shared in-house counsel with GEA, and those two attorneys had the opportunity to influence the IPR proceedings. GEA and Procomac shared the same outside law firm as well, according to Steuben Foods. The patent owner argued that “[a] party that funds or directly controls an IPR or PGR petition or proceeding constitutes a real party-in-interest,” and that the relevant consideration regarding control is whether the alleged real party-in-interest “could have exercised control.” In support of its contention, Steuben Foods cited the related district court proceedings where Procomac had allegedly suggested prior art for the IPR proceedings.
GEA contended that it alone was the real party-in-interest and vigorously resisted the patent owner’s discovery requests. GEA initially refused to produce invoices from its law firm, relying on attorney-client privilege and the work product doctrine. Steuben Foods contended that any such privilege had been waived through the petitioner’s declarant’s reference to the invoices. Without addressing the issue of waiver, the PTAB ordered the petitioner to produce the invoices with appropriate redactions. The redactions were to include specific descriptions of services provided by the law firm but general references to services provided were not to be redacted. Any references to an IPR expense were to be produced even if the invoice also referred to an expense for the related litigation.
AIA / IPR / Routine Discovery / Addition Discovery
Not So “Routine Discovery” in AIA Proceedings
In two orders issued from the U.S. Patent and Trademark Office Patent Trial and Appeals Board (PTAB or Board) in unrelated proceedings, the PTAB denied requests for “additional” or “non-routine” discovery because the moving party failed to demonstrate that the discovery was “otherwise necessary in the interest of justice” and discussed the bounds of permissible discovery in inter partes review (IPR) proceedings by denying Atlanta Gas Light Company v. Bennett Regulators Guards, Inc., IPR No. IPR2013-00453 (PTAB, Oct. 6, 2014) (Boucher, APJ); Aker BioMarine AS, et al. v. Neptune Technologies and Bioresources Inc., IPR No. IPR2014-00003 (PTAB, Oct. 6, 2014) (Green, APJ).
An important congressional objective of the America Invents Act (AIA) was to provide a quick and cost-effective alternative to federal district court patent litigation. With that goal in mind, the statute and rules only provide for limited discovery in AIA proceedings. Under 35 U.S.C. § 316(a)(5), discovery is limited to the deposition of witnesses submitting affidavits or declarations, and what is otherwise necessary in the interest of justice. The PTAB considers various factors to determine whether “additional” or “non-routine” discovery is “necessary in the interest of justice,” including whether (1) the request is based on more than a mere possibility of finding something useful, (2) the request does not seek the litigation positions of the other party, (3) the information is not reasonably available through other means, (4) the request is easily understandable, and (5) the request is not overly burdensome to answer.
In Atlanta Gas, the patent owner sought to exclude deposition testimony (that was taken as routine discovery) based on an allegation that the court reporter was biased, citing an alleged contractual relationship between the court reporter and the petitioner. The petitioner submitted a declaration in opposition, which under the rules permitted the patent owner to depose that declarant. But the patent owner also sought document production (i.e., additional discovery), which the PTAB denied. The PTAB found that the patent owner had not demonstrated that the information sought (i.e., the existence of a contractual relationship) could not be obtained through cross-examination of the declarant, which was already permitted.
In Aker, the petitioner sought several documents from the patent owner—as “additional discovery”—that the petitioner was aware of from a U.S. International Trade Commission investigation. These documents included deposition testimony that the petitioner alleged to contain testimony inconsistent with positions taken by the patent owner. Although the PTAB denied the request for documents, it reminded the parties that if such documents containing inconsistencies existed, those documents were already required as “routine discovery” (as long as they were not protected by legally recognized privileges).
Practice Note: While the PTAB’s order in the Aker IPR may be interpreted as already directing the patent owner to provide the requested documents because it may be required to under the rules, the PTAB seems to leave it to the patent owner to decide if such documents contain inconsistent positions and are discoverable. Moreover, the PTAB does not address what recourse the petitioner may have if the patent owner fails to honor its routine discovery obligations. Here, the motion to compel was stylized as a motion to compel additional discovery, which may be why the motion was ultimately denied. In seeking discovery in PTAB proceedings, a party must carefully consider whether to refer to the discovery sought as “routine” or “additional” under the rules. While routine discovery is required (and a motion should be granted if it is indeed routine), a party should not expect to receive additional discovery without a compelling justification for it.
AIA / IPR / Supplemental Evidence
Contract Prohibiting Patent Challenges Does Not Preclude Standing to File IPR Petition
Addressing whether it has the authority to decide a contractual dispute in the context of a post issuance proceeding under the America Invents Act (AIA), the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) denied a patent owner’s argument that the petitioner lacked standing by virtue of a provision in an arbitration agreement with the petitioner that purportedly limits the petitioner’s ability to challenge the validity of the patent, finding that the issue was one of contract law that fell outside the PTAB’s authority under the AIA. Ford Motor Co. v. Paice LLC, Case No. IPR2014-00570 (PTAB, Sept. 30, 2014) (DeFranco, APJ).
Ford filed a petition for inter partes review (IPR) against a patent owned by Paice. Ford and Paice were also parties to a co-pending district court action. In that action, Paice moved for a preliminary injunction based on an agreement between Ford and Paice. Specifically, the issue before the district court was whether Ford’s IPR petition was a breach of an arbitration agreement with Paice, limiting Ford’s right to challenge Paice’s patent. The district court had not yet decided that issue.
Nevertheless, Paice opposed Ford’s petition to the PTAB on similar grounds. Paice asserted that Ford did not have standing to file its petition under 37 C.F.R. § 42.104(a). Paice argued that the agreement is unambiguous and bars Ford from challenging the patent. Ford’s petition, according to Paice, was a breach of the agreement that otherwise precludes Ford’s standing.
The PTAB rejected Paice’s standing argument, explaining that Paice was conflating a breach of contract issue with a standing issue. As the PTAB explained, contractual disputes fall outside the PTAB’s purview under the AIA, and it thus declined Paice’s invitation to decide the breach-of-contract issue. Noting that the contract dispute was still pending before the district court, the PTAB further concluded there was insufficient evidence to support Paice’s standing argument. Accordingly, the PTAB authorized institution of IPR.
AIA / IPR / Motion to Amend
Patentee May Cancel but May Not Substitute Claims when Proposed Amended Claims Are Not Shown To Be Unobvious *Web Only*
Addressing the burden of establishing the patentability of claim amendments in inter partes review (IPR), the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) denied a patent owner’s motion to amend claims based upon its finding that the proffered amended claims would have been obvious to one of ordinary skill in the art. Intelligent Bio-Systems, Inc. v. Illumina Cambridge Ltd., Case No. IPR 2013-00266 (PTAB, Oct. 28, 2014) (Crumbley, APJ.)
Petitioner Intelligent Bio-Systems petitioned for IPR of Illumina’s patent on grounds that certain claims were anticipated by any of three prior art references. The PTAB instituted IPR on those grounds. Illumina elected not to file a response to that decision and instead submitted a motion to amend the patent claims under review.
The patent relates to methods of sequencing DNA by the stepwise addition of a detectable label and blocking group so that the sequence of the target DNA may be determined one nucleotide at a time. The PTAB noted that such a sequence-by-synthesis technique was nothing new. Amendments offered by Illumina thus sought to narrow the claims to the use of cleavable labels bound to target DNA by a disulfide linkage. The PTAB, applying the broadest reasonable interpretation standard, construed the claims under review as further limited to uses of blocking groups that can be cleaved under the same conditions as a disulfide bond but without requiring a specific structure.
Intelligent Bio-Systems demonstrated that multiple prior art references gave a skilled worker reason to use a disulfide linker in a stepwise synthesis reaction. Such a linkage would, for example, ensure that attachment of the detectable label to the target nucleotide would not interfere with the action of a polymerase enzyme during the synthesis reaction. Counter-arguments by Illumina’s expert that one of skill could not modify prior art teachings to arrive at the patent methods failed to persuade the PTAB.
Considering this evidence as a whole, the PTAB concluded that Illumina failed to carry its burden of proving by a preponderance of evidence that the proposed substitute claims were patentable over the prior art considered in the opinion. The PTAB thus denied Illumina’s motion to enter substitute claims. However, the PTAB granted Illumina’s motion to the extent it cancelled the remaining patent claims under review.
AIA / IPR / Discovery / Timing of Examination of Declarant
No Cross-Examination of Expert at the Close of Evidence *Web Only*
Addressing the appropriate timing of cross-examination of expert witnesses in an inter partes review (IPR), the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) denied a patent owner’s request to delay cross-examination of the petitioner’s expert witness until after the due date of the petitioner’s reply, finding that a witness’ reply declaration is not supplemental evidence. A.C. Dispensing Equipment Inc. v. Prince Castle LLC, Case No. IPR2014-00511 (PTAB, Oct. 15, 2014) (Kamholz, APJ).
The patent owner sought to delay cross-examination of the petitioner’s expert until either the petitioner’s reply was filed or the deadline for the same had passed. The patent owner argued that under 37 C.F.R. § 42.53(d)(2), any new declaration submitted by the expert in support of the petitioner’s reply would constitute supplemental evidence, and therefore cross-examination of the expert should be delayed until the close of evidence.
The PTAB disagreed, explaining that “the more efficient course . . . is to expect a party to conduct cross-examination of a witness once the witness’s direct testimony becomes ripe for cross examination, i.e., after any supplemental evidence relating to direct testimony is due, and at least one week before the due date of the party’s next substantive paper.” The PTAB felt postponing cross-examination until the close of evidence impaired the orderly development of the record and delayed identification of factual issues to be resolved during trial. Further, the PTAB did not consider a witness’s reply declaration to be supplemental evidence to the petition declaration because the two declarations do not relate to the same issues, since a reply declaration may only be used to rebut evidence proffered by a patent owner in its response, not to present additional proofs to bolster the witness’ original declaration.
AIA / IPR / Deposition Practice
Play Nice in the Deposition Sandbox
In two separate orders on the conduct of the proceeding, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) came down on the parties for their inability to amicably resolve disputes that arose during witness depositions without intervention by the PTAB. Medtronic, Inc. v. Norred, Case Nos. IPR2014-00110 and IPR2014-00111, Paper 23 (PTAB, Oct. 8, 2014) (Weatherly, APJ); Case Nos. IPR2014-00110 and IPR2014-00111, Paper 24 (PTAB, Oct. 9, 2014) (Grossman, APJ).
The patent at issue relates generally to an aortic heart valve that can be placed inside a patient without the need for open-heart surgery. The petitioner filed two petitions for inter partes review (IPR) of the patent, asserting that several of the patented claims were invalid as anticipated and/or obvious.
During witness depositions, two separate disputes broke out between the parties. The first dispute centered around the scope of the patent owner’s questions during re-direct examination of the named inventor witness. In the petitioner’s cross-examination of the witness, counsel questioned the witness about two specific exhibits. During re-direct examination, counsel for the patent owner asked questions about two additional exhibits. The petitioner objected that the re-direct exhibits were beyond the scope of the cross-examination testimony, and initiated a conference call with administrative patent judges (APJs) to obtain guidance on the matter.
The APJs noted that all of the exhibits at issue were part of one or both of the IPR petitions. Specifically, “[t]he fact that a document is an exhibit and thus is proffered as evidence, does not establish that the document is admissible or establish its probative value. It does establish, however, that the document is relevant for inquiry during deposition.” The APJs further noted that the exhibits at issue, like the exhibits from cross-examination, were hand-drawn sketches created by the inventor and related to the development of the patent at issue. Therefore, the APJs ordered that the patent owner could obtain re-direct deposition testimony from the additional exhibits.
In the second dispute, the petitioner again initiated a conference call with the APJs, seeking guidance regarding the form in which the patent owner’s counsel could object to deposition questions of an expert witness. The petitioner asserted that opposing counsel was utilizing improper “speaking objections.” By way of example, the petitioner noted one specific objection that “began, ‘Objection, misleading . . .’ and then went on to explain at some length that the question was misleading because it asked for a conclusion from the witness based on only a portion of a patent that Patent Owner contends was ‘taken out of context.’”
The APJs agreed with the petitioner, and found that the patent owner’s objections were improper under the guidelines set forth in the Office Patent Trial Practice Guide. Counsel for the patent owner was ordered to cease such improper objections immediately and was cautioned that further such violations might result in sanctions.
AIA / IPR / Motion for Observation
Motion for Observation Must Follow Guidelines
The U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) dismissed a patent owner’s improper motions for observation, agreeing with the petitioner that the observations cited too much testimony and were overly argumentative. Medtronic, Inc. v. NuVasive, Inc., Case Nos. IPR2013-00506; IPR2013-00507; IPR2013-00508 (PTAB, Oct. 15, 2014) (Medley, ALJ).
Patent owner NuVasive filed motions for observation in each of the above inter partes reviews (IPRs) to draw the PTAB’s attention to cross-examination testimony of petitioner Medtronic’s reply declarant. The petitioner opposed the motions and argued that the motions were improper because they contained new arguments and new evidence, essentially constituting a sur-reply to the petitioner’s reply.
The PTAB found that the petitioner’s motions for observation violated the PTAB’s guidelines, which state that each observation should be a concise statement of the relevance of precisely identified testimony to a precisely identified argument or portion of an exhibit (including another part of the same testimony). Further, the PTAB explained that an observation is not an opportunity to raise new issues, to re-argue issues or to pursue objections. Each observation should not exceed one short paragraph, should not contain argument and should be presented in the following format:
In exhibit __, on page __, lines __, the witness testified __. That testimony is relevant to the __ [stated or argued] on page __, lines __ of __. The testimony is relevant because __.
The PTAB also warned that in considering whether a motion for observation is improper, the entire motion might be dismissed (and consequently not considered) if even one excessively long or argumentative observation is presented. The PTAB found that at least some of the patent owner’s observations in each motion were improper as they cited several pages of testimony (not one portion of testimony as required), and presented an overly argumentative explanation of the testimony’s relevance.
Because the PTAB found at least one improper observation in each motion, it dismissed the motions (in their entirety) but did so without prejudice, and authorized the patent owner to file corrected motions. The PTAB also noted that the guidelines apply equally to responses to motions for observation.
AIA / IPR / Antedating Prior Art References
High Evidentiary Threshold for Diligence in Reducing Invention to Practice
Addressing the evidentiary threshold to show diligence in constructive or actual reduction to practice between the date of a prior art reference and the date the invention was reduced to practice, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB) rejected a patent owner’s attempt to antedate prior art, finding that in order to show diligence the patent owner must explain in detail the activities that occurred during the critical period, and that even a short period of inactivity may be sufficient to defeat a claim of diligence. Oracle Corp. v. Click-to-Call Technologies LP, Case No. IPR2013-00312 (PTAB, Oct. 28, 2014) (Zecher, APJ).
Patent owner Click-to-Call (CTC) owned a patent directed to establishing anonymous telephone communications. After the petitioner was accused of infringing the CTC patent, it filed a petition for inter partes review arguing that the claims of the patent were anticipated or obvious in view of a prior art patent (Dezonno). In response, the patent owner did not argue against the asserted anticipation and obviousness contentions. Rather, the patent owner attempted to show a date of invention before the effective date of the Dezonno prior art. However, the PTAB found that the patent owner was not diligent in reducing the invention to practice between a time immediately before Dezonno’s earliest effective filing date and the date CTC’s invention was either constructively or actually reduced to practice.
For patent applications filed under the “first to invent” system (i.e., before the effective date of the America Invents Act), a prior art reference dated less than one year before the earliest effective filing date of the patent application may be antedated by showing invention of the claimed technology before the date of the reference, and diligence in reducing the claimed technology to practice between immediately before the date of the reference and the date the claimed technology was reduced to practice. Reduction to practice may either be constructive (filing a patent application) or actual (building a system that implements the technology).
In the instant case, the PTAB did not reach the issue of whether the inventor of the CTC patent conceived of the invention before Dezonno’s effective date, but rather focused on the issue of diligence towards reduction to practice. The Dezonno reference issued on April 21, 1995. CTC showed that a constructive reduction to practice of its claim invention occurred on the filing of its patent application on August 9, 1995, and that an actual reduction to practice occurred on August 15, 1995, i.e., when a system implementing the invention was built. Thus, in connection with its diligence proofs, the patent owner needed to show either diligence in preparing the patent application from a time immediately before April 21, 1995, up to August 9, 1995, or diligence in building the system implementing the invention from a time between immediately before April 21, 1995, up to August 15, 1995.
Regarding constructive reduction to practice, the patent lawyer who drafted the application testified that he prepared a draft of the patent application leading to the patent just prior to April 21, 1995, and personally revised this draft between April 21 and May 9, 1995. The inventor testified that between May 9, 1995, and July 17, 1995, he “continued to make progress on the preparation of my patent application.” The PTAB found that the testimony of the two individuals did not demonstrate diligence because there was no evidence of what work was performed between May 9, 1995, and July 17, 1995. The PTAB noted that more specific details concerning the work that was done during these dates would be necessary to support a finding of diligence.
Regarding diligence in actual reduction to practice, the inventor testified that he worked with three software developers—ICS, ProDesign and SofTel—in reducing the patented technology to practice. However, the PTAB found that neither the inventor nor any of the software developers was diligent between May 15, 1995, and June 15, 1995. Regarding the inventor’s personal efforts, he testified that between April 20, 1995, and August 15, 1995, he worked 12 hours a day, seven days a week, to diligently reduce the technology to practice. However, the PTAB found that the inventor did not provide any details as to what he did, and only stated a legal conclusion.
Regarding the work of ICS, the inventor’s company showed that it had made payments to ICS on May 15, 1995, and on July 1, 1995. However, there was no testimony about the work actually performed during this time. Thus, the PTAB found that there was insufficient evidence to satisfy the diligence requirement between May 15, 1995, and July 1, 1995.
The work of the two other vendors, ProDesign and SofTel, started too late in time to help the patent owner establish activities during the diligence period.
AIA / IPR / Antedating Prior Art References
Independent Corroboration Required To Prove Conception *Web Only*
Addressing the requirements for antedating prior art, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB) ruled all claims of a challenged patent unpatentable, finding that in order to prove prior conception, an inventor’s testimony must be independently corroborated. Microsoft Corp. v. SurfCast, Inc., Case Nos. IPR2013-00292; and -00295 (PTAB, Oct. 14, 2014) (Clements, APJ).
Microsoft filed four petitions requesting inter partes review of a single patent that had claims related to a graphical user interface that organizes content from a variety of information sources into a grid of tiles, each with an independent refresh rate. SurfCast sought to antedate a prior art reference, a patent that Microsoft relied on as a § 102(e) reference. As evidence of conception dates, each inventor submitted a declaration. To corroborate the inventors’ testimony, SurfCast submitted physical exhibits in the form of e-mails exchanged between the two inventors, entries from one inventor’s notebook, white papers, photographs of a flip chart and a letter from SurfCast’s lawyers. Along with its physical exhibits, SurfCast offered a summary of Federal Circuit law in support of the contention that corroboration is not required for physical exhibits submitted to prove conception. Microsoft challenged the authenticity of the proffered evidence.
The PTAB, noting that SurfCast had misapprehended Federal Circuit case law, found that the patent owner had not proven prior conception. Specifically, the PTAB reaffirmed that for physical evidence submitted to corroborate conception, the dates of the conception documents were required to be corroborated, not just the contents of the documents. Crucially, the corroboration had to be by someone other than the inventors. The PTAB noted that the purpose of corroboration is to prevent fraud by providing independent confirmation of inventor testimony. A document authenticated by only an inventor does not achieve that purpose because it is not sufficiently independent.
The PTAB then analyzed SurfCast’s offer on the issue of diligence and noted that it failed to adequately evidence the exercise of continuous activity. For its analysis, the PTAB explained that a party alleging diligence must provide corroboration with evidence that is specific as to both facts and dates. For corroboration, SurfCast submitted invoices from its law firm, time entries and a declaration of an expert, as well as a declaration of a SurfCast co-founder. The PTAB noted that all of this evidence was uncorroborated by other independent evidence. The PTAB further observed that a declarant, Dr. Bones, had a financial interest in the outcome of the co-pending district court case and as a result had a financial interest in the IPR proceedings.
AIA / IPR / Motion to Terminate Proceedings
Joint Motions to Terminate Pre-Institution IPRs Should Explain Why Termination Is Appropriate *Web Only*
Addressing what information “should” be in a joint motion to terminate proceedings at the pre-institution stage, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB) denied without prejudice the parties’ joint motions to terminate, authorizing the parties to re-file corrected joint motions, finding the parties’ joint motions deficient for failing to include “(1) a brief explanation as to why termination is appropriate; (2) the identity of all parties in any related district court case involving the patents at issue in the proceedings sought to be terminated, (3) the identity of any related proceedings currently before the Office; and (4) the current status of each such related case or proceeding with respect to each party to the case or proceeding.” The PTAB later granted supplemental joint motions based on the additional information provided by the parties. RPC Formatec GMBH v. Trudell Medical Int’l, Case Nos. IPR2014-01040; -01127 (PTAB, Oct. 24, 2014) (Elluru, APJ).
In the initial order, the PTAB reminded the parties that, while the PTAB “expects that a proceeding will terminate after the filing of a settlement agreement,” the PTAB “is not a party to the settlement, and may independently identify any question of patentability.” The PTAB then denied, without prejudice, the joint motions to terminate for failing to provide the information listed above, and authorized the parties to re-file corrected joint motions.
The parties’ supplemental joint motions to terminate explained that termination was appropriate because (1) the PTAB had not decided the merits of the proceedings; (2) the petitioner would not participate in the inter partes review proceedings if they were not terminated; (3) no dispute remained between the patent owner and petitioner involving the relevant patents; (4) there were no other proceedings related to the challenged patents; (5) and, because the proceedings were at a very early stage, termination promotes the congressional goal to establish a more efficient and streamlined patent system that limits unnecessary and counterproductive litigation costs. In consideration of the circumstances, the PTAB granted the parties’ joint motions to terminate.
AIA / IPR / Counsel Attendance at Hearing
Patent Owner’s General Counsel Allowed to Substitute Designated Counsel at Oral Hearing *Web Only*
Addressing a patent owner’s request in an inter partes review (IPR) to be excused from attending the oral hearing in view of the financial burden involved in counsel preparation and attendance, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB or Board) indicated its expectation that the patent owner’s counsel attend all proceedings that may materially affect the patent owner’s interests, but allowed the patent owner’s general counsel to attend the oral hearing in place of the designated counsel. Butamax Advanced Biofuels LLC v. Gevo, Inc., Case No. IPR2013-00539 (PTAB, Oct. 10, 2014) (Crumbley, APJ).
Following a timely request from the petitioner, the PTAB set a date for the oral hearing. Although the patent owner did not file a request for oral hearing, it did not oppose the petitioner’s request. Later, Gevo informed the PTAB that it would like to rely on its previously filed response to the petition and not attend the oral hearing because it did not want to undertake the financial burden involved in counsel preparing for and attending the oral hearing. Gevo did not request cancellation of the hearing or oppose Butamax’s appearance at the hearing.
Citing Butamax’s statutory right to a hearing under 35 U.S.C. § 316(a)(10) and the panel’s position that oral hearing would assist the PTAB in deciding the issues in the case, the PTAB decided that an oral hearing should be held in the case, but that Gevo’s counsel could attend telephonically. When Gevo informed the PTAB that holding the oral hearing telephonically was insufficient to address Gevo’s financial considerations, the PTAB emphasized the importance of Gevo’s counsel being present at the hearing to answer any questions the PTAB may have or to respond to any arguments made by Butamax. The PTAB advised Gevo that it could inform the PTAB of its wish to rest on its briefs and not make an oral argument at an appropriate time during the oral hearing.
The PTAB also suggested that Gevo could name additional back-up counsel and request permission for the back-up counsel to attend the hearing in place of its currently designated counsel. Gevo then requested permission to allow its general counsel to replace the current counsel for the oral hearing. The PTAB agreed, provided that Gevo filed a motion for pro hac vice admission of its general counsel and updated its mandatory notices to designate its general counsel as back-up counsel in this proceeding.
Claims Directed to a Mental Task Are Abstract, but Computerizing an Old Practice Is Not
Alexander P. Ott
Addressing the issue of patent-eligible subject matter for covered business method (CBM) patents, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB) instituted a CBM review on § 101 grounds in Cambridge Assocs., LLC v. Capital Dynamics, CBM2014-00079 (PTAB, Sept. 8, 2014) (Praiss, APJ) but declined to institute a § 101 basic review in PNC Bank et al. v. Secure Axcess, LLC, CBM2014-00100 (PTAB, Sept. 9, 2014) (Benoit, APJ). In Cambridge Assocs., the PTAB preliminarily concluded that the claimed method for benchmarking assets was directed to an abstract idea, whereas the PTAB did not find an abstract idea in the claimed method for authenticating a web page in PNC Bank.
Cambridge Associates petitioned for a CBM review after it was sued for infringement of a patent directed to a method for analyzing the performance of financial products with irregular cash flows by applying a scaling function. Cambridge asserted that the patent was directed to ineligible subject matter and that the challenged claims were obvious in view of various combinations of three prior art references.
After concluding that the challenged patent presented subject matter standing for a CBM review, i.e., because the patent addressed the non-technical financial problem of comparing equity returns, the PTAB turned to whether the claimed subject matter was patent eligible. The PTAB concluded that the claims were likely unpatentable because they could be performed by a human without a computer, or with a pencil-and-paper analysis, and the reference to a computer amounted to nothing more than an instruction to implement the abstract idea on a computer. The patent owner argued that the claims do not completely cover the abstract idea because alternative methods of benchmarking are available, but the PTAB found the argument unpersuasive, noting that the steps used in the claimed method were conventional.
Similarly, PNC Bank petitioned for a CBM review after it was sued for infringement of a patent directed to a method for authenticating a website by adding an authenticity stamp. PNC asserted that the challenged claims were directed to ineligible subject matter, were obvious and were not supported by sufficient written description.
In this case, the patent owner argued that CBM standing was lacking because the claims were applicable generally, not just to financial websites, and lacked any financial or monetary claim terms. The PTAB disagreed and pointed to the specification’s disclosure of financial institutions’ particular need for the claimed solution, and noted that the patent had been asserted in various lawsuits against financial institutions.
On the merits, the PTAB concluded that the claims were not directed to an abstract idea but rather were directed to transforming data in a particular manner. PNC argued that the claims merely computerized the “centuries old practice” of placing a trusted stamp or seal on a document to indicate authenticity, but the PTAB countered that the claims call for a web page rather than a paper document. The PTAB also rejected PNC’s argument that the claims covered nothing more than manipulating and collecting data, and responded that the claims could not be performed entirely in the human mind and instead required a change in the data itself.
While the CBM review in Cambridge Assocs. will proceed on the basis of institution, ineligible subject matter, the PTAB declined to go forward on obviousness. In PNC Bank, the PTAB did institute a CBM review as to obviousness, but declined to proceed on insufficient written description.
AIA / CBM / Pre-Institution Procedure
Failure to Address All Graham Factors Dooms CBM Petition *Web Only*
Addressing the showing required to institute covered business method (CBM) proceedings based on obviousness, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB) denied the petitioner’s request for rehearing of the PTAB’s prior denial to institute CBM proceedings, finding that the petitioner had failed to meet its burden of demonstration and refusing to consider arguments newly raised in support of the petition. Travelocity.com L.P. v. Cronos Technologies LLC, Case No. CBM2014-00082 (PTAB, Oct. 16, 2014) (Arpin, APJ).
The PTAB found that “because Petitioner failed to identify the differences between each of the applied references and the subject matter recited in the challenged claims, Petitioner failed to demonstrate why a person of ordinary skill in the relevant art would combine the references in the manner proposed to achieve the recited subject matter, as required by Graham.” The PTAB elaborated, “without knowing what limitations of the recited claims are alleged to be missing from one reference and supplied by another, we concluded that Petitioner’s proffered reasons for combining [the applied references] to teach or suggest the challenged claims are insufficient.”
The PTAB agreed with the petitioner that the record included evidence of a motivation to combine the applied references. However, “[i]nformation contained in exhibits or portions of exhibits, but not discussed in the Petition, is not incorporated into the Petition merely by the exhibits’ presence in the record.” Thus, the PTAB refused to consider the petitioner’s argument based on the evidence because the argument was not presented prior to the petitioner’s request for rehearing.
In response to the petitioner’s argument that the PTAB overlooked the patent owner’s failure in its preliminary response to argue that the petition failed to provide substantive grounds to combine the teachings of the applied references, the PTAB noted that “Petitioner bears the burden of demonstrating that it is more likely than not that Petitioner would prevail in showing unpatentability on the grounds asserted in its Petition,” and that the patent owner was not required to file a preliminary response. “Therefore, contrary to Petitioner’s assertion, nothing may be gleaned from the Patent Owner’s challenge or failure to challenge the grounds of unpatentability for any particular reason.”
Finally, in response to the petitioner’s argument that the PTAB failed to apply the correct legal standard for finding obviousness over a single reference, the PTAB found that the petitioner had not previously asserted “any grounds of unpatentability based on any of the applied references individually.” Consequently, the PTAB refused to consider these newly raised grounds of unpatentability of the challenged claims.
Practice Note: Petitioners may be loath to acknowledge that a prior art reference lacks any feature of a claim. If a petitioner believes that a reference discloses all features of a claim, but that combination with another reference provides an alternative and possibly stronger ground of unpatentability, both grounds can and should be included in the petition. If properly executed, this approach can avoid detrimental acknowledgments while providing sufficient identification of the differences between the references and the claims to permit evaluation of the reasons for combination. The petitioner here omitted from its petition grounds of unpatentability based on individual references “to simplify the number of grounds for trial.” Inclusion of an excessive number of grounds is a legitimate concern, as highlighted by Canon Inc. v. Intellectual Ventures I LLC (IP Update, Vol. 17, No. 10) (49 grounds across three petitions for inter partes review were too many). However, the addition of only a few additional grounds to the petition may have better served the petitioner here.
AIA / CBM / Motions to Seal
PTAB Applies Balancing Test in Deciding Motions to Seal Evidence *Web Only*
K. Nicole Clouse, PhD
In an recent covered business method (CBM) patent review proceeding, the U.S. Patent and Trademark Office Patent Trial and Appeal Board (PTAB) denied the parties’ motions to seal because they did not sufficiently show that the content sought to be sealed “is truly confidential, and that such confidentiality outweighs the strong public interest in having an open record.” Search Am., Inc. v. TransUnion Intelligence, LLC, Case Nos. CBM2013-00037; -00038 (PTAB, Oct. 2, 2014) (Giannetti, APJ).
In this CBM proceeding, the parties filed eight motions to seal various documents in full or in part. Noting that the moving party has the burden of showing that the motion should be granted, the PTAB denied all eight motions on the grounds that the movants did not provide sufficient evidence that the relevant documents were, in fact, confidential. The strongest of these motions attempted to show the requisite “good cause” for sealing by asserting that the relevant documents contain “non-public and business sensitive communications” and that the documents had been “designated as ‘Confidential’ in the related district court litigation.” The PTAB explained that the movant did not provide “proof” that the relevant content was actually confidential, and that this showing was insufficient, “especially when weighed against the public’s access rights to the evidence relied on by the parties.” The other seven motions provided even less evidence, merely stating that the relevant content had been marked or designated as “confidential.”
The PTAB further noted that the parties did not meet its procedural requirement to meet and confer in good faith before filing the motions in order to discuss “whether there is a need to seal the documents, and whether redaction can substantially reduce or eliminate altogether the need for sealing.”
Practice Note: In light of the dearth of evidence concerning the confidentiality of the documents in this particular case, it seems unlikely that the parties here could have saved their motions simply by having met and conferred before filing the motions. That said, parties in future cases would be well advised to comply with this procedural requirement and show the court that they made a good faith effort to reduce or eliminate the need for sealing.
Procedural Missteps Cause Fifth Circuit to Affirm Judgment, Fee Award
In an unpublished decision, the U.S. Court of Appeals for the Fifth Circuit held that a federal district court did not abuse its discretion in issuing a default judgment and fee award against a registered trademark owner based in part on the owner’s procedural missteps. M2 Tech., Inc. v. M2 Software, Inc., Case No. 13-4106014 (5th Cir., Oct. 20, 2014) (per curiam).
David Escamilla and his company, M2 Software, Inc., provide information-technology management services under the mark M2. In 1995, the parties registered the mark M2 with the U.S. Patent and Trademark Office (USPTO) in M2 Software’s name. In 2008, plaintiff M2 Technology, unaffiliated with Escamilla and M2 Software, applied to register M2 and M2 TECHNOLOGY with the USPTO. Escamilla opposed the applications before the USPTO’s Trademark Trial and Appeal Board, and M2 Technology withdrew the applications. However, M2 Technology kept using the M2 marks in connection with its business.
In 2011, Escamilla sued M2 Technology for trademark infringement and appeared pro se. M2 Technology moved to dismiss the case for failure of Escamilla to join M2 Software (the trademark registrant) as a necessary party. As non-natural persons cannot appear before the court pro se, and Escamilla did not want to hire counsel to represent M2 Software, Escamilla failed to join M2 Software and the case was dismissed without prejudice. Escamilla appealed and the Fifth Circuit affirmed.
In July 2012, M2 Technology sued M2 Software for a declaratory judgment that its use of the M2 marks did not infringe M2 Software’s rights. Escamilla filed a motion to intervene and a motion to dismiss, but M2 Software never entered an appearance. In October 2012, Escamilla once again sued M2 Technology raising the same claims as the 2011 action. The district court denied Escamilla’s motion to intervene in the July 2012 case, reasoning M2 Software adequately represented Escamilla’s interests, and granted M2 Technology’s request for a declaratory judgment based on M2 Software’s default. The court awarded M2 Technology attorney’s fees and costs related to the declaratory judgment case on the grounds that M2 Software’s conduct was “exceptional.” Escamilla and M2 Software appealed.
On appeal, the Fifth Circuit affirmed that denying Escamilla’s motion to intervene was proper because M2 Software would have adequately represented Escamilla’s interests. Escamilla is sole shareholder of M2 Software with exclusive control over the company, and the fundamental objective of the company is to derive profit benefiting Escamilla. Thus, the Court held there was no “clear abuse of discretion” in denying Escamilla’s motion.
The Fifth Circuit also upheld the district court’s declaratory judgment holding based on M2 Software’s default. Even though Escamilla’s motion to intervene was timely filed, M2 Software failed to appear until nearly one year after the relevant deadline, and such appearance was a notice of appearance of counsel, not a substantive pleading. Because M2 Software failed to explain its non-participation in the case, the Court held that the default judgment was not an abuse of discretion.
Finally, the Fifth Circuit held that the district court’s fee award to M2 Technology was “reasonable,” because “exceptional” circumstances governed the series of cases between the parties. Escamilla repeatedly attempted to litigate the cases on behalf of M2 Software pro se, despite being informed multiple times that counsel must represent non-natural persons. The Court held that this provided a “plausible basis” for determining that the case is exceptional, and there was no clear error by the district court in awarding M2 Technology attorney’s fees.
Copyrights / Statute of Limitations
Seventh Circuit Cites Petrella to Save Copyright Suit from Dismissal
The U.S. Court of Appeals for the Seventh Circuit applied the Supreme Court of the United States’ May 2014 ruling in Petrella (IP Update, Vol. 17, No. 5) when it reversed an Illinois district court’s dismissal of a copyright infringement claim and confirmed that the applicable statute of limitations does not begin to run when a copyright owner has mere “inquiry notice” of infringing acts, but only once the copyright owner has actually discovered an act of copyright infringement. Chicago Building Design, P.C., et. al. v. Mongolian House, Inc., et. al., Case No. 12-3037 (7th Cir., Oct. 23, 2014) (Sykes, J.)
The dispute between Chicago Building Design (CBD) and restaurant company Mongolian House arose “out of a failed business relationship between an . . . architectural firm and its client” over blueprints for an upscale Chicago restaurant. Mongolian House hired CBD to design and renovate the interior of a restaurant space, and in 2006, CBD filed blueprints for the restaurant design with the city of Chicago to obtain a “repair and replace” permit. The restaurant renovation project was completed in 2007, and the blueprints for the Mongolian House restaurant became the subject of a 2009 U.S. copyright registration owned by CBD.
In 2008, during a visit to the Chicago city offices, a CBD employee saw a set of blueprints that appeared to be a copy of CBD’s blueprints for the Mongolian House restaurant, but which bore the name of another architect. In order to investigate the potential copyright issue, CBD immediately requested a copy of the blueprints from the city under the state’s Freedom of Information Act, but the request was refused when the city found the blueprints to be “exempt from disclosure.”
Shortly thereafter, the architect listed on the copy of CBD’s blueprints filed the copy with the city of Chicago in order to obtain a new permit for further renovations of Mongolian House’s restaurant space. CBD then discovered a newly issued permit for the blueprints reported in the city’s May 8, 2009, Building Data Warehouse Report. Just short of three years later, on February 13, 2012, CBD sued Mongolian House for copyright infringement alleging violation of CBD’s exclusive right to copy, distribute and create derivative works when Mongolian House passed CBD’s blueprints off as its own and used the infringing blueprints to obtain a new permit and to clear various city building inspections between 2009 and 2012.
The district court granted Mongolian House’s motion to dismiss based on the three-year statute of limitations period under §507(b) of the Copyright Act, holding that CBD was on “inquiry notice” of possible copyright infringement when its employee saw the duplicate blueprints in the city office in 2008, thereby putting the 2012 suit outside of the three-year window. CBD appealed.
Citing Petrella, the Seventh Circuit explained that the Copyright Act establishes a “separate accrual rule” so that each infringing act starts a new statute of limitations period. In reversing the district court’s dismissal, the court held that CBD’s February 2012 complaint alleged potentially infringing acts that occurred within the “three-year look-back period.” Specifically, the court stated that “inquiry notice is not the same as actual or constructive discovery,” and determined that CBD’s actual discovery of the new building permit as well as Mongolian House’s occasional distribution of the infringing blueprints to building inspectors between 2009 and 2012 fell within the three-year limitations period for CBD’s infringement claims.
Mongolian House argued that any post-2008 distribution of the blueprints qualified as a “limited publication” outside of the Copyright Act. The court noted, however, that the “limited publication” argument is addressed by the merits of the case rather than the statute of limitations. The court made sure to clarify that its decision extended to the statute of limitations issue only, and reversed and remanded for further legal and factual development on the issue of copyright infringement for those acts of alleged infringement by Mongolian House that fall within the relevant three-year look-back period.
No Fair Use for Digital Excerpts
The U.S. Court of Appeals for the 11th Circuit vacated the district court’s decision holding that digital excerpts of books from three academic publishers provided to students at Georgia State University were protected by fair use, finding that the district court erred in giving each of the four factors used in the fair use analysis equal weight. Cambridge University Press et al v. Patton et al., Case Nos. 12-14676; 15147 (11th Cir., Oct. 17, 2014) (Tjoflat, J.)
Oxford University Press, Cambridge University Press and Sage Publications (collectively, the plaintiffs) sued several officials at Georgia State University (GSU) claiming that GSU had encouraged its professors to upload copyrighted works to the school’s electric reserve system.
After the district court ordered the publishers to produce a list of the claimed infringements, it found that only five infringements had resulted from the university’s policies. The district court found that in 43 instances the digital copies were protected by fair use. The plaintiffs appealed.
The concept of fair use in copyright law refers to whether the reproduction of a particular work—such as criticism, comment, news reporting, teaching, scholarship and research—may be considered fair. Section 107 of the Copyright Act sets out the following four factors to be considered in determining whether or not a particular use is fair: (1) the purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for, or value of, the copyrighted work.
On appeal, the publishers argued that previous case law held that copying material for a paper course pack does not constitute fair use. The 11th Circuit reversed, finding that the district court erred in giving each of the four factors used in the fair use analysis equal weight. The Court agreed with the district court that the first factor, directed to the nature of the use, favored GSU because the use was for nonprofit educational purposes. The Court also agreed with the district court regarding the fourth factor (economic impact) but explained that it should have given this factor more weight, because the threat of market substitution was severe.
The 11th Circuit did not agree with the district court’s analysis regarding the second and third factors, explaining that the nature of the works was neutral or slightly against fair use since the material at issue contained analytical or descriptive material, or was based on the author’s opinions. As for the third factor, the district court explained that whether the amount copied was “reasonable in light of the pedagogical purpose of the use and the threat of market substitution” should have been the subject of analysis, rather than a set quantity limit of 10 percent or one chapter. The district court’s decision that the 43 copyrighted materials were protected by fair use was therefore reversed.
Confidentiality Agreements Not Enforceable in Absence of Reasonable Efforts to Preserve Confidentiality
Applying Illinois law, the U.S. Court of Appeals for the Seventh Circuit reminded prospective business partners that non-disclosure agreements will not be effective by themselves to protect information a company regards as confidential and proprietary. To be enforceable, the information itself must ostensibly be “confidential” and must also be subject to reasonable efforts on the part of the company to preserve its confidentiality. nClosures Inc. v. Block and Company, Inc., No.13-3906 & 14-1097 (7th Cir., Oct. 22, 2014) (Flaum, J.)
In 2011, Block approached nClosures about forming a partnership to develop and market enclosures for communication devices, such as iPads and other tablet products. The parties entered into a confidentiality and non-disclosure covenant so that they could explore the potential partnership. The non-disclosure agreement provided that “[t]he parties . . . agree that the Confidential Information received from the other Party shall be used solely for the purpose of engaging in the Discussions and evaluating the Objective.  Except for such Permitted Purposes, such information shall not be used, either directly or indirectly, by the Receiving Party for any other purpose.” Based on the non-disclosure agreement, nClosures provided Block with certain of its confidential and proprietary information, including product designs, market knowledge, manufacturing set-up, solid models and assembly drawings.
nClosures alleged that Block took nClosures’ confidential information and used it to create its own iPad tablet enclosure. During the development of Block’s product, Block allegedly reiterated to nClosures that a partnership existed between the parties, although the parties ultimately never signed a final partnership agreement. Block launched its own enclosure product in August 2012, and later that month indicated to nClosures that Block would no longer sell products by nClosures, effectively terminating the business relationship between the parties.
nClosures filed suit asserting claims for fraud, trade secret misappropriation, breach of fiduciary duty, breach of contract claim and unfair competition. nClosures moved for a preliminary injunction based upon the breach of contract claim and Block’s alleged use of nClosures’ confidential designs and manufacturing knowledge. The district court granted nClosures’ motion for a preliminary injunction and enjoined Block from using nClosures’ tablet enclosure designs, manufacturing know-how and market knowledge until the district court reached a final determination on the merits. After the parties filed cross-motions for summary judgment, the district court granted summary judgment in favor of Block. nClosures appealed.
In its appeal, nClosures challenged the district court’s decision regarding nClosures’ breach of contract and breach of fiduciary claims.
The Contract Is Not Always King
The Seventh Circuit affirmed the district court’s summary judgment in favor of Block on the breach of contract claim, citing Tax Track Sys. Corp. v. New Investor World, Inc. The Court explained that under Illinois law, courts “will enforce confidentiality agreements only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.” Thus, a non-disclosure agreement is of limited legal value unless, behind it, the evidence demonstrates that the information subject to the agreement is truly confidential and remains so by virtue of reasonable measures to preserve its confidentiality.
Although the Seventh Circuit acknowledged that nClosures and Block had signed a non-disclosure agreement at the outset of their business relationship, it pointed out that nClosures did not require confidentiality agreements from other companies or individuals who accessed the design files for its proprietary enclosure products, including an independent contractor who created the initial enclosure designs and a third-party company that initially manufactured the enclosure products. It further noted that nClosures failed to mark its design drawings with designations such as “CONFIDENTIAL” or “CONTAINS PROPRIETARY INFORMATION.” Nor did nClosures maintain the design files under lock and key or store them in a computer with restricted access. Consequently, the Court concluded, “[t]hese facts show that nClosures did not engage in reasonable steps to protect the confidentiality of its proprietary information, and therefore the confidentiality agreement with Block is unenforceable.”
Partnership Requires Co-Ownership and Profit-Sharing
nClosures argued that Block violated its fiduciary duties by manufacturing and marketing its own iPad enclosures without providing any benefit to nClosures, its purported partner. The district court concluded that because the parties were not, in fact, partners under the law, Block owed no fiduciary duties to nClosures and therefore no breach of those duties could have occurred. The Seventh Circuit affirmed.
Ordinarily, partners owe fiduciary duties to fellow partners, including the sharing of benefits of a joint enterprise. In upholding the district court’s determination that no partnership was formed between Block and nClosures, the Seventh Circuit, citing Illinois statutory law, explained that parties must be co-owners and share profits in order for a partnership to be recognized. The Court explained that foremost among the considerations courts consider in determining if a partnership has formed is whether the parties have agreed to share profits and losses.
The Seventh Circuit concluded that no reasonable jury could find that nClosures and Block formed a partnership, and consequently, Block did not owe or violate any fiduciary duty to nClosures.
Practice Note: At least in the Seventh Circuit, non-disclosure agreements only go so far. If a party fails to take reasonable steps to ensure its proprietary information remains confidential, a confidentiality agreement will not fill the gap, and neither will the courts.
Trade Secrets / Arbitration / Punitive Sanctions
Fabricating Evidence and Losing Arbitration *Web Only*
Addressing an issue of whether an arbitrator inappropriately sanctioned a party that had been found to have fabricated evidence and whether the arbitrator refused to consider certain evidence, the Minnesota Supreme Court upheld the arbitrator’s sanctions and the $630 million award. Seagate Tech., LLC v. W. Digital Corp, Case No. A12-1944 (Minn. Supr. Ct., Oct. 8, 2014) (Anderson, J.) The Court concluded that the arbitrator’s award, which included punitive sanctions, was proper even though it did not give weight to certain evidence presented during the arbitration hearing.
Sining Mao worked for Seagate, designing hard disk drives. Mao’s employment contract required him to preserve the confidentiality of all trade secrets and included an arbitration clause. In 2006, Mao left Seagate and began working for Western Digital, a competitor of Seagate. Seagate subsequently alleged that Western Digital and Mao (collectively WD) misappropriated Seagate’s trade secrets, which Western Digital then used for its own designs. After Seagate filed suit, WD invoked the arbitration clause of the employment agreement, and the district court stayed the lawsuit.
During the ensuing arbitration proceeding, Seagate brought a motion for sanctions against WD for fabricating evidence. Seagate alleged that Mao had altered an old PowerPoint presentation to include new slides to make it appear as if the information alleged to be trade secrets had been presented in public.
The arbitrator sanctioned WD for this fabrication by precluding any evidence or defense disputing the validity of the trade secrets or the misappropriation and the use of the trade secrets by WD. The sanctions also included a judgment against WD of liability for misappropriation of the trade secrets accompanied by an award of $630 million.
WD brought a motion in state court to vacate the award and sanctions, arguing that the arbitrator exceeded his authority by imposing punitive sanctions and had not properly heard all evidence material to the controversy. After the trial court agreed that the exclusion of evidence by the arbitrator was improper, Seagate appealed. Seagate argued among other things that the trial court had erred in its determination that the arbitrator had exceeded his authority and that WD, the party that sought arbitration, had not waived its right to challenge the sanctions. The state court of appeals overturned the trial court’s decision and reinstated the award, concluding that WD had waived its right to challenge the arbitrator’s ability to issue punitive damages. The case was then heard by the Minnesota Supreme Court.
The Minnesota Supreme Court disagreed that there had been a waiver, but agreed that the arbitrator’s award should be upheld. As for the waiver issue, the Court found nothing in the statute imposing any requirement that would lead to a waiver.
As for the award, the Court found the arbitrator’s ability to issue punitive sanctions in the arbitration agreement itself, i.e., the controlling document. The arbitration agreement provided for “injunctions or other relief” or “any remedy or relief that would have been available to the parties had the matter been heard in court.” In response to WD’s argument that punitive sanctions did not serve as a remedy or relief, the Court explained that in this case, the punitive sanctions were used to redress the wrong of the fabricated evidence. The Court further concluded that the preclusion of evidence order was proper, as it would have also “been available to parties had the matter been heard in court.” Finally, the Court made quick work of WD’s argument that the arbitrator violated the requirement to hear material evidence when he issued the preclusion order including punitive sanctions. The Court found that the evidence was heard by the arbitrator, but the arbitrator merely chose not to factor it into the final award. The arbitration award was reinstated in full.
Trade Secrets / Arbitration / Scope of Arbitration Clause
Arbitrator Should Decide Whether Dispute Falls Within the Scope of the Arbitration Claus
Joshua David Rogaczewski
Addressing who should decide whether a dispute falls within the scope of an arbitration clause, the U.S. Court of Appeals for the 11th Circuit reversed a district court’s denial of a motion to compel arbitration and remanded the case for an order compelling arbitration. U.S. Nutraceuticals, LLC v. Cyanotech Corp., No. 13-12863, 2014 WL 5471913 (11th Cir., Oct. 30, 2014) (Pryor, J.) (Wilson, J., dissenting).
The dispute over the scope of the arbitration clause existed because the clause changed over the course of the parties’ history. In the parties’ initial agreement, all disputes were to be resolved in arbitration. In 2010, however, the parties amended the agreement and, in relevant part, carved out of the arbitration clause disputes relating to the breach of the confidentiality provision of the parties’ agreement. When one party sued the other for tortious interference and breach of the confidentiality provision, the defendant raised whether the dispute belonged in arbitration rather than litigation and moved a federal court to compel arbitration. If the earlier agreement’s clause applied, then the parties would be required to arbitrate; if the more recent agreement’s clause applied, then the case could stay in the court system. The district court held that the 2010 clause applied and denied the motion to compel arbitration. Cyanotech appealed.
The 11th Circuit disagreed, noting first that both versions of the parties’ arbitration clause—like many arbitration clauses—incorporated the rules of the American Arbitration Association into it. Under 11th Circuit precedent, such incorporation constituted a clear agreement to have an arbitrator decide whether the arbitration clause applies. To avoid the all-inclusive arbitration clause in the earlier agreement, the plaintiff sued only under the 2010 agreement. But the 11th Circuit considered this a mere “legal label” and examined the “true thrust” of the complaint (i.e., the facts alleged therein), which the court concluded implicated both the 2010 contract and the earlier. In this case, that meant an arbitrator should decide whether the carve-out in the 2010 arbitration clause applies or not.
The dissenting judge took the plaintiff at its word and concluded that only the 2010 version of the clause applied. Accordingly, the dissent would have affirmed the district court’s reliance on the carve-out and refusal to compel arbitration.
Practice Note: This case teaches several lessons to practitioners. First, individuals or companies with long-standing relationships, governed by a sequence of agreements, should be cognizant of differences in their arbitrations clauses over time. Second, when parties agree to change their arbitration clauses, they should consider whether they intend the changes to be retroactive. Third, negotiators should consider including language regarding who decides arbitrability. Finally, when pleading a dispute, consider whether claims can be pleaded to fall within (or without) a particular arbitration clause.