IP Update Vol. 22, No. 11

Patents

PATENTS / AIA / PTAB PRACTICE

Principal or Inferior? PTAB APJ Appointment Held Unconstitutional


Rebecca Harker Duttry

In what has quickly turned into a controversial decision, the US Court of Appeals for the Federal Circuit held the appointment of administrative patent judges (APJs) at the Patent Trial and Appeal Board (PTAB) unconstitutional. The Court found that PTAB judges were appointed as if they were “inferior officers” but vested by the PTAB with authority that is reserved for Senate-confirmed “principal officers.” Arthrex, Inc. v. Smith & Nephew, Inc., Case No. 18-2140 (Fed. Cir. Oct. 31, 2019) (Moore, J). The decision creates uncertainty in dozens of inter partes review (IPR) proceedings.

Arthrex appealed a final PTAB decision based on a challenge to the APJs under the Appointments Clause. Arthrex argued that the APJs were not constitutionally appointed because as principal officers, they must be appointed by the president with the advice and consent of the Senate. APJs are appointed by the secretary of commerce, in consultation with the director of the US Patent and Trademark Office (PTO) pursuant to 35 USC § 6(a).

At issue on appeal was whether APJs are inferior or principal officers under the Constitution’s Appointment Clause. While there are no exclusive criteria for distinguishing between principal and inferior officers under the Appointments Clause, the main difference between the two is that the work of inferior officers is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate. In the 1997 case of Edmond v. United States, the Supreme Court of the United States emphasized three factors to consider to determine whether officers are inferior or principal officers:

  • Whether an appointed official has the power to review and reverse the officers’ decision
  • The level of supervision and oversight an appointed official has over the officers
  • The appointed official’s power to remove the officers.

The Federal Circuit found that the secretary of commerce and the PTAB director are the only two presidentially appointed officers that provide direction to the PTO, and focused its analysis on the roles of these two officers in relation to the PTAB APJs.

First, the Federal Circuit found that no presidentially appointed officer has independent statutory authority to review a final written decision by the APJs before the decision issues on behalf of the United States. Even though the director of the PTAB has the power to intervene and become a party in an appeal following a final written decision with which she disagrees, the director has no power to review, nullify or reverse a final written decision issued by a panel of APJs. In general, the director participates as a member of the PTAB, rather than as a supervisor of the PTAB, which the Federal Circuit found insufficient to rise to the level of review and reversal power over the APJs’ decisions so as to render the APJs inferior officers. Thus, the Court found that this factor weighed in favor of a conclusion that APJs are superior officers.

Second, the Federal Circuit analyzed the extent to which an APJ’s work is supervised or overseen by another executive officer. The PTAB director exercises a broad policy-direction and supervisory authority over the APJs. The Court found that the director has discretion to promulgate regulations governing the conduct of IPR, issue policy directives, and provide exemplary applications of patent laws to fact patterns, which may guide the APJs’ decision-making. Further, the director’s administrative authority, such as the independent authority to decide whether to institute an IPR based on a filed petition and any corresponding preliminary response, as well as the authority to designate the panel of judges that decides each IPR, can affect the procedure of individual cases, which the Federal Circuit found demonstrated the director’s authority over the APJs. The Court concluded that while this oversight authority is high-level, arms-length control, the nature of the director’s supervisory powers weigh in favor of a conclusion that APJs are inferior officers.

Third, the Federal Circuit considered the extent of the power of another officer to remove an APJ. Both the secretary of commerce and the director lack unfettered removal authority over an APJ under the America Invents Act (AIA). Although the director can remove an APJ from a given panel based on the director’s authority to designate which members of the PTAB will sit on any given panel, the director lacks the statutory authority to remove an APJ from office without cause. The Federal Circuit found that even though removing an APJ from a particular IPR panel is a form of control, it is not the power to remove an APJ from office without cause. The only actual removal authority the director or secretary has over an APJ is the standard removal procedures relating to federal employees, namely, removal “only for such cause as will promote the efficiency of service,” requiring that the employee’s misconduct be likely to have an adverse impact on the agency’s performance of its functions. 5 USC § 7513(a). Given that no other officer has significant removal authority over the APJs, the Court found that this factor weighed in favor of a conclusion that APJs are superior officers.

Having concluded that APJs are principal officers and that lack of control over these officers renders their appointment in violation of the Appointment Clause, the Federal Circuit next considered potential remedial approaches to this issue. The Court gave the PTO director the power to fire PTAB judges without cause, explaining that such authority would create the necessary oversight for the PTAB and its APJs to pass constitutional muster. However, in terms of the case on appeal, the Court vacated and remanded the PTAB’s decision, ordering that a new panel of APJs must be designated and a new hearing granted.

The scope of this holding is narrow, requiring that an affected AIA review be reheard by a new panel only where “final written decisions were issued and where litigants present an Appointments Clause challenge on appeal.” Thus, this decision will affect already-appealed AIA reviews in which opening appeal briefs have not yet been filed, as well as AIA reviews that have not yet been appealed but are still within the appeal window. The Federal Circuit has made it clear that where an Appointments Clause challenge was not raised in opening briefing, the challenge was waived.

Practice Note: While the full impact of this decision remains unclear, it appears the holding will immediately affect many pending cases. Some estimates note that at least 200 AIA reviews may be subject to rehearing. RPX Insight (Nov. 8, 2019). The Federal Circuit is strictly adhering to its waiver ruling. See e.g., Customedia Tech v. Dish Network.

Practitioners that have not already filed an opening appeal brief in an appealed AIA review, whether they have already filed for appeal or have not yet done so, may be entitled to a rehearing before the PTAB if they lodge an appeal based on the Appointments Clause.

Judges Dyk and Newman publicly criticized the Arthrex decision in Judge Dyk’s concurring opinion in Bedgear v. Fredman Bros. Furniture, Case Nos. 18-2082, -2083, -2084 (non-precedential), arguing that the Federal Circuit’s order mandating new hearings is not required under law and will only impose unnecessary burdens on the IPR system. Possibly heralding a sua sponte en banc review of the issue, a Federal Circuit panel (Judges Reyna, Wallach and Hughes) ordered supplemental briefing (due December 6, 2019, and limited to 20 pages) in a pending appeal, Polaris Innovations v. Kingston Technology, Case No 18-1768 (in which the United States has intervened), as follows:

 

O R D E R

IT IS ORDERED THAT:

The parties and the government shall file supplemental briefing addressing the constitutional questions raised in these cases, including:

  • what level of supervision and review distinguish a principal from an inferior officer;
  • whether severing the application of Title 5’s removal restrictions with respect to APJs under 35

U.S.C. § 3(c) sufficiently remedies the alleged unconstitutional appointment at issue in these appeals;

  • whether, and how, the remedy for an Appointments Clause violation differs when it stems from an unconstitutional removal restriction, rather than an unconstitutional appointment itself; and
  • whether severing the application of Title 5’s removal restrictions with respect to APJs under 35

U.S.C. § 3(c) obviates the need to vacate and remand for a new hearing, given the Supreme Court’s holdings on the retroactive application of constitutional rulings.

Many trademark practitioners are now concerned that a challenge to the Trademark Trial and Appeal Board (TTAB) judges would be resolved (at the Federal Circuit) in a manner similar to the Arthrex decision

E.g., Harper v. Virginia Dep’t of Taxation, 509 U.S. 86 (1993).

Each party’s response is limited to 20 pages, double spaced, and shall be filed no later than December 6, 2019.


PATENTS / § 101 (ELIGIBILITY – LAWS OF NATURE)

Hooke, Line and Sinker: Mechanical Patent Caught by § 101 Exception


| Gilbert Smolenski

In a divided panel decision, the US Court of Appeals for the Federal Circuit affirmed that method claims for a mechanical invention were invalid under 35 USC § 101, and concluded that the claim was directed to a law of nature and was not limited to an inventive concept. American Axle & Manufacturing, Inc. v. Neapco Holdings LLC, Case No. 2018-1763 (Fed. Cir. Oct. 3, 2019) (Dyk, J) (Moore, J, dissenting). This case highlights that even mechanical inventions may fall under the judicial exceptions to § 101.

American Axle & Manufacturing (AAM) sued Neapco for infringement of three patents. The parties filed cross-motions for summary judgment on whether one of AAM’s patents was patent ineligible under 35 USC § 101. The claims of the patent at issue were generally directed to a method of manufacturing driveline propeller shafts. The claimed manufacturing method included tuning a liner for a driveline propeller shaft to attenuate at least two types of vibrations transmitted through the shaft. The district court concluded that the claims were not patent eligible under § 101 because they were directed to two laws of nature: Hooke’s law and friction damping. AAM appealed.

The Supreme Court of the United States has developed a two-part inquiry to determine patent eligibility under § 101. At step one, courts ask whether the claims are directed to a judicial exception—laws of nature, natural phenomena or abstract ideas. If a claim is directed to a judicial exception, the court proceeds to determine at step two whether the claim embodies an inventive concept. A patent claim found to be within a judicial exception is patent eligible only if it embodies an inventive concept.

In this case, the Federal Circuit panel focused its analysis on step one. The majority found that the claimed invention was nothing more than a recitation of Hooke’s law and therefore was undoubtedly a law of nature. The majority rejected AAM’s arguments, concluding that neither the claims nor the specification instructed how the variables of the liner could be changed to produce the claimed multi-dampening liner: “This case might well be significantly different, if, for example, specific [finite element analysis] models were included in the claims.”

This explanation highlights the majority’s argument that the claims were invalid because neither the claims nor the specification provided a directive as to how to use the knowledge of Hooke’s law “to engage in an ad hoc trial-and-error process of changing the characteristics of a liner until a desired result is achieved.”

Turning to step two of the § 101 framework, the majority quickly found that there was no inventive concept because the invention was a trial-and-error application of Hooke’s law.

In a vigorous dissent, Judge Moore accused the majority of neglecting step two. Judge Moore first disagreed with the majority that the claims were directed to a natural law. Judge Moore also argued that even if the claims were directed to a natural law, there were many articulated inventive concepts that should have precluded summary judgment. Finally, Judge Moore argued that the majority was conflating patent eligibility under § 101 with principles of enablement under § 112. In Judge Moore’s view, the majority found the claims ineligible because the patent did “not teach a skilled artisan how to tune a liner.”

Practice Note: This case highlights that mechanical patents are not entirely outside the purview of § 101. Patentees should ensure that their claims and corresponding specification make clear that the claimed invention is more than an application of general physics or mathematical principles.


PATENTS / OBVIOUSNESS

Real-World Evidence of Clinical Failure Cuts Against Reasonable Expectation of Success


K. Nicole Clouse, PhD

Finding that a Patent Trial and Appeal Board (PTAB) assessment of reasonable expectation of success was not supported by substantial evidence, the US Court of Appeals for the Federal Circuit reversed the PTAB’s obviousness determination. OSI Pharm., LLC v. Apotex Inc., Case No. 18-1925 (Fed. Cir. Oct. 4, 2019) (Stoll, J).

OSI’s patent claims priority to 2000, and the relevant claims recite methods of treating non-small cell lung cancer (NSCLC) with a prior art compound, erlotinib. The PTAB found the claims invalid in an IPR proceeding over the Schnur reference in combination with either the Gibbs reference or OSI’s 10-K filing. Schnur discloses 105 compounds, a group in which erlotinib is a preferred embodiment, as inhibitors of epidermal growth factor receptor that are useful for treatment of a variety of different cancers, including lung cancer. However, Schnur does not teach erlotinib for treatment of NSCLC in particular.

Gibbs generally states that erlotinib and another compound called ZD-1839 appear to have activity against NSCLC, and cites two conference abstracts as supporting that proposition. One abstract discusses ZD-1839 for use in NSCLC, and the other discusses erlotinib for other kinds of cancer besides NSCLC. The PTAB found a “clear inference” that erlotinib has activity against NSCLC, even though neither reference actually provides that teaching and despite a sworn declaration from Dr. Gibbs that he was not aware of any abstracts or articles published as of the time of his article that contained such a teaching. The PTAB concluded that the combination of Schnur and Gibbs taught treatment of NSCLC with erlotinib with a reasonable expectation of success.

The OSI 10-K discloses that erlotinib was entering Phase II clinical trials, and the PTAB concluded that a skilled person would therefore understand the 10-K to teach that Phase I clinical studies and preclinical animal studies had already been successfully performed with erlotinib. Given that the claims at issue are generic to “mammals” and do not specify treatment of humans, the PTAB concluded that a skilled person would understand the OSI 10-K as teaching erlotinib for treatment of NSCLC with a reasonable expectation of success. The PTAB therefore found OSI’s patent claims obvious. OSI appealed.

The Federal Circuit reversed, concluding that the PTAB misinterpreted the cited references as teaching more than was supported by substantial evidence. The Court found that the Gibbs reference and abstracts cited therein did not expressly teach erlotinib for treatment of NSCLC, particularly in view of Dr. Gibbs’s sworn declaration. The Court also found that the OSI 10-K did not actually disclose any information about erlotinib’s effect on NSCLC or specify that any of the underlying preclinical data pertained to NSCLC as opposed to other forms of cancer.

As to the PTAB’s reasonable expectation of success finding, the Federal Circuit pointed to evidence showing that developing therapies for NSCLC is extremely unpredictable, including a statistic that more than 99.5% of NSCLC drugs that entered Phase II between 1990 and 2005 never obtained US Food and Drug Administration approval. In view of this real-world evidence and the fact that none of the cited references disclosed even in vitro “test tube” data, let alone data from an animal, to the effect that erlotinib is useful for NSCLC treatment, the Court found that the references “provide no more than a hope” that erlotinib could be effective for treatment of NSCLC.

Practice Note: The Court was careful to state that its holding does not mean that efficacy data is always required for a reasonable expectation of success, and expressly stated that its decision is limited to the particular facts of this case. However, this decision could make it more challenging to invalidate method of treatment claims, particularly where the real-world evidence indicates that treatment for a particular condition is unpredictable.


PATENTS / AIA / OBVIOUSNESS / OBJECTIVE INDICIA (COPYING)

Evidence of Actual Copying Efforts May Be Relevant to Secondary Indicia


David Mlaver

The US Court of Appeals for the Federal Circuit vacated and remanded an obviousness determination by the Patent Trial and Appeal Board (PTAB), holding that the PTAB erred in disregarding a factual finding that the petitioner copied the patented method. Liqwd, Inc. v. L’Oreal USA, Inc., Case No. 18-2152 (Fed. Cir. Oct. 30, 2019) (Reyna, J).

Liqwd owns a patent directed to a method for bleaching hair. L’Oreal filed a petition for post-grant review of the patent on several grounds, including obviousness. Before the PTAB, Liqwd presented evidence purported to show that L’Oreal copied Liqwd’s patented method as an objective indicia of non-obviousness. The evidence showed, among other things, that Liqwd had disclosed to L’Oreal (subject to a non-disclosure agreement) the then-confidential application that ultimately issued as Liqwd’s patent.

The PTAB made a factual finding that L’Oreal used the particular claimed method as a result of its access to Liqwd’s confidential information—i.e., that L’Oreal had copied the patented method. However, the PTAB disregarded this finding because Liqwd failed to show that L’Oreal had copied a specific patented product. The PTAB ultimately determined that the patent claims were obvious. Liqwd appealed.

The Federal Circuit held that it was error for the PTAB to disregard its finding that L’Oreal had copied the patented method. The Court distinguished between cases in which a patentee seeks an inference of copying from the mere similarity of the accused product to its own embodiments of the claimed invention and cases in which there is direct evidence of copying. The Court held, subject to the requirement to show a nexus between the claims and the alleged evidence of copying, that “where there is evidence of actual copying efforts, that evidence is always relevant” to the obviousness inquiry. The Court explained that because the evidence in this case was actual copying efforts by L’Oreal, it was relevant to, and should have been considered in, the obviousness analysis. The Court vacated the PTAB’s obviousness determination and remanded for further proceedings to take into account the finding of copying.

Practice Note: The Court reviewed the PTAB’s factual finding regarding copying for substantial evidence and did not hold that similar evidence would establish copying in other cases. The Court held only that copying was relevant and gave no guidance as to its relative weight in this case, which will presumably be one of the issues on remand.

The Court attempted to contextualize its holding within the long line of cases requiring copying of a specific product. It remains unclear how any tension between the instant holding and the prior line of cases would be resolved if it were reviewed en banc or on further appeal.


PATENTS / INVALIDITY / INDEFINITENESS / INDUCEMENT

Definiteness, Drug Labels and Diclofenac, Oh My


Amy M. Lange

The US Court of Appeals for the Federal Circuit affirmed a district court’s invalidity and infringement judgments for patents directed to a topical nonsteroidal anti-inflammatory drug, finding that a patent claim reciting a list “consisting essentially of” is indefinite where the basic and novel property of the invention is indefinite. HZNP Medicines LLC, Horizon Pharma USA, Inc. v. Actavis Laboratories UT, Inc., Case No. 17-2149 (Fed. Cir. Oct 10, 2019) (Reyna, J) (Newman, J, dissenting in part, concurring in part). The Court also found no inducement because the label for the allegedly infringing drug did not instruct users to perform the patented steps.

HZNP owns composition and method patents directed to topical diclofenac, a nonsteroidal anti-inflammatory drug that has been marketed to treat knee osteoarthritis as PENNSAID® 2%. Horizon was the original owner of these patents and filed a patent infringement lawsuit against Actavis after Actavis filed an abbreviated new drug application (ANDA) requesting approval to market a generic version of PENNSAID® 2%. During the course of the district court proceeding, HZNP became the owner of the patents and substituted itself as the plaintiff. During claim construction, the district court found that three terms in the asserted formulation patents were indefinite. It subsequently granted summary judgment of non-infringement on HZNP’s method of use patents. Finally, at trial, the district court found a remaining formulation patent non-obvious, and, based on the parties’ stipulation, infringed. Both parties appealed.

Addressing claim construction, the Federal Circuit agreed with the district court that the term “impurity A” present in several asserted formulation claims was indefinite because the intrinsic evidence did not refer to its identity or chemical structure. Further, the Court found that the meager information provided on the high performance liquid chromatography procedure used in eluting it would not direct a person of ordinary skill in the art to identify the compound in an external pharmacopeia. The Court also found that the term “degradation” was indefinite because Horizon defined it in terms of “impurity A.”

The Federal Circuit agreed with the district court that the term “consisting essentially of” was indefinite. It has been determined that when this clause proceeds a list of ingredients in a composition, the claim not only includes the items in the list but also is open to additional unlisted ingredients that do not materially affect the basic and novel properties of the invention. In this case, the Court found that the basic and novel properties of the invention were listed but not defined with reasonable certainty to allow a person of ordinary skill in the art to discern the scope of the properties. Specifically, the property of “better drying time” was indefinite because the methods for determining it as outlined in the specification (including the appropriate timeframe to evaluate), did not show consistent results.

Turning to invalidity based on prior art, the Federal Circuit affirmed the district court’s judgment of non-obviousness of a formulation patent. Actavis argued that an asserted patent covering the PENNSAID 2% formulation was an obvious modification of an earlier product, PENNSAID 1.5%. Many of the ingredients in PENNSAID 2% were present in PENNSAID 1.5%, but in different amounts, and an additional ingredient not present in PENNSAID 1.5% was present in PENNSAID 2%. The Federal Circuit agreed that the drug formulation involved complex and unpredictable art, where changing each ingredient affected the others. Therefore, developing PENNSAID 2% by modifying PENNSAID 1.5% was not obvious.

As to non-infringement, the Federal Circuit found that while Actavis’s drug label was similar to one of HZNP’s asserted method of use patents, it did not induce infringement of the patent. Actavis’s label stated “[w]ait until the area is completely dry before applying sunscreen, insect repellent, lotion,” while the patent recited a method with steps, including “waiting for the treated area to dry” and “subsequently applying a sunscreen, or an insect repellant.” The Federal Circuit found that Actavis’s label permitted, but did not instruct or require, a user to perform the patented steps. Therefore, the label did not provide the requisite intent to induce infringement.

Practice Note: The term “consisting essentially of” can broaden claim scope, but one must ensure that the invention’s properties are defined, or risk indefiniteness. Additionally, an ANDA label including information on all steps of a method patent does not induce infringement if it does not specifically require that the user to follow each step.


PATENTS / ENABLEMENT

Broad Genus of HCV Compounds Wasn’t Enabled or Described


Amy Mahan, PhD

In a case relating to compounds for the treatment of the Hepatitis C virus (HCV), the US Court of Appeals for the Federal Circuit upheld a district court’s grant of judgment as a matter of law (JMOL) for lack of enablement and reversed the court’s denial of JMOL for lack of written description, finding that practicing the full scope of the claims required excessive experimentation. Idenix Pharmaceuticals LLC v. Gilead Sciences, Inc., Case No. 18-1691 (Fed. Cir. Oct. 30, 2019) (Prost, J) (Newman, J, dissenting).

Idenix filed a patent infringement suit against Gilead alleging that imminent US Food and Drug Administration approval and launch of Gilead’s HCV treatment drug sofosbuvir would infringe Idenix’s patent. Gilead stipulated to infringement under the district court’s claim construction but argued that the patent was invalid for failure to meet the written description and enablement requirements. The jury rejected Gilead’s arguments and upheld the patent’s validity. Gilead filed a renewed motion for JMOL with respect to written description and enablement. The district court denied the motion with respect to written description but granted JMOL on enablement. Idenix appealed.

The independent claim at issue on appeal claims a method of treating HCV by administering a β-D-2’-methyl-ribofuranosyl nucleoside or a phosphate thereof. The patent specification describes the synthesis and antiviral activity of 8 β-D-2’-methyl-ribofuranosyl nucleoside compounds that have the following basic structure:

On appeal, Idenix argued that the key to its invention was the methyl group (CH3) in the 2’-up position (green oval). The district court construed “β-D-2’-methyl-ribofuranosyl nucleoside” to mean that there must be a methyl group in the 2’ up position, but that the substituents at the 2’ and 3’ down positions (which is depicted as an –OH group in the drawing above) could be “any non-hydrogen substituent.” Based on this construction, billions of theoretical compounds fall within the structural limitations of the claim.

Idenix argued that a person of ordinary skill in the art would not attach substituents at random and instead would know to “take into account the patent as a whole to focus on a ‘significantly smaller’ set of candidate compounds.” In addition to the eight compounds that were synthesized and tested for antiviral activity, the specification described the formula of thousands of “principal embodiments” of the claimed invention that had this 2’-methyl-up substituent. These additional embodiments were untested and uncharacterized, and the Federal Circuit found that given the unpredictability in the art, a person of skill in the art would have to test each of the thousands of compounds that met the structural limitations of the claims in order to determine which compounds were effective against HCV. While Idenix argued that such testing was routine, the Court found that the “decision here rests on the ‘limits on permissible experimentation’ not on the relative time that experimentation would take.” Here, practicing the full scope of the claims would have required excessive experimentation even if routine, and thus the patent was invalid for lack of enablement.

The Federal Circuit also found that the claims lacked written description. For the billions of compounds not disclosed by formula in the specification, the Court found that the “specification . . . provides no method of distinguishing effective from ineffective compounds” and therefore failed to adequately describe the necessary structural features of the genus. Further, the Court noted that the specification failed to disclose any “2’-flouro-down compounds” (Gilead’s infringing product was a 2’-flouro-down compound). The Court found that “in light of the conspicuous absence of that compound, a person of ordinary skill in the art would not ‘visualize or recognize the members of the genus’ as including 2’-fluor-down, and the specification could not demonstrate to a [person of skill in the art] that the inventor had possession of that embodiment at the time of filing.”

Judge Newman dissented, stating that the error was in interpretation of claim scope. She argued that a reasonable jury could have found that the claims were directed to the 8 β-D-2’-methyl-ribofuranosyl nucleoside compounds with antiviral data, and that claims of this narrower scope would comply 35 USC § 112.

Practice Note: Enablement is a fact-specific analysis, but here Idenix relied on antiviral activity of just eight compounds with very similar chemical structures to support claims to a much broader genus of compounds. At least in the chemical arts, it appears that the courts are looking for more experimental data from compounds with more diverse structures to support broad genus claims.


PATENTS / SUMMARY JUDGMENT

No Brainer: Summary Judgment Based on Non-Asserted Grounds Procedurally Improper


Amol Parikh

The US Court of Appeals for the Federal Circuit reversed a district court’s summary judgment grant of non-infringement because it was improperly granted on a ground that was not asserted by the accused infringer. NeuroGrafix et al. v. Brainlab, Inc., et al., Case No. 18-2363 (Fed. Cir. Oct. 7, 2019) (Taranto, J).

NeuroGrafix owns a patent directed to a method for generating images of nerves and other bodily structures using diffusion tensor imaging (DTI), an application of MRI technology. DTI exploits certain characteristics of water diffusion. Diffusion along white matter nerve tracts is anisotropic, meaning substances such as water diffuse freely along the main, long axis of the nerve tract. However, diffusion is very limited in a direction perpendicular to (across) that axis. By contrast, the surrounding gray matter is relatively isotropic, meaning substances diffuse at similar rates in all directions. NeuroGrafix’s patent claims a method for exploiting these difference by applying pulsed magnetic field gradients in two orthogonal directions so that neural tissue can be identified and visually differentiated from the surrounding structures by determining the areas of greater relative anisotropy.

NeuroGrafix sued Brainlab for patent infringement, alleging that users of Brainlab’s FiberTracking software directly infringed NeuroGrafix’s patent and that Brainlab induced direct infringement by its users through statements in its manual and advertisements. After discovery, Brainlab filed a motion for summary judgment of non-infringement, arguing that users of the FiberTracking software did not satisfy the “selected structure” limitation of the asserted claim. Brainlab argued that “selected structure” requires that a user know the “existence and location” of the structure of interest before performing the claimed method, and it was impossible for users of FiberTracking to “select[] structures” before scanning, since the software does not allow users to isolate or select specific structures before scanning.

NeuroGrafix opposed the motion, arguing that “selected structure” does not require that the precise location and orientation of the chosen structure be known in advance, and, in any event, users could satisfy the claim by (for example) obtaining a preliminary MRI image, choosing a structure that would be “distinctive and visibly apparent” from the preliminary image (such as a pyramidal tract) and then performing the steps of the claimed method with the chosen structure as the subject. NeuroGrafix also argued that Brainlab’s advertisements stated that users can employ the software to image the pyramidal tract, and Brainlab’s manual instructed users to select fiber bundles to include or exclude a region of interest.

The district court granted Brainlab’s motion but rejected Brainlab’s argument that some aspects of the “selected structure” must be known in advance. The court found that depending on the physician’s purpose, FiberTracking was capable of both infringing and non-infringing uses. Nevertheless, the court granted Brainlab’s motion because NeuroGrafix had not pointed to evidence that any FiberTracking users actually used the software in an infringing manner. The court also found that instances of direct infringement and inducement could not be inferred from statements in Brainlab’s advertisements that it was “possible” to create preliminary images, since those statement did not actually teach an infringing use of the device. NeuroGrafix appealed.

The Federal Circuit reversed the grant of summary judgment, finding that it was procedurally improper. The Court found that the district court’s determination that the FiberTracking software was capable of infringing and non-infringing uses was sufficient to defeat summary judgment, since NeuroGrafix demonstrated a genuine dispute of material fact on the only issue raised by Brainlab, namely whether FiberTracking was capable of infringing use. The Court explained that it was procedurally improper for the district court to grant summary judgment on a ground that was not asserted by the movant or made subject of the action such that the non-movant had notice of the obligation to come forward with all supporting evidence. The Court found that evidence of actual infringing use was unnecessary to answer the only grounds for summary judgment asserted by Brainlab, and that granting summary judgment on grounds not asserted was improper. The Court reversed the grant of summary judgment and remanded for further proceedings.

Practice Note: The Federal Circuit noted that while the summary judgment decision here was procedurally improper, NeuroGrafix could not sustain a claim of direct infringement by merely showing that the accused software was capable of operating in an infringing manner. NeuroGrafix must show that the software was actually used in an infringing manner by Brainlab (for direct infringement) or by one or more of Brainlab’s customers (for indirect infringement).


PATENTS / “PREVAILING PARTY”

No Judgment on Merits Necessary to Achieve Prevailing Party Status


Colin J. Stalter

The US Court of Appeals for the Federal Circuit affirmed a district court finding that an accused infringer was the “prevailing party” entitled to fees under Rule 54(d)(1) when the patent owner’s claim was dismissed for mootness following a Patent Trial and Appeal Board (PTAB) finding of unpatentability. B.E. Tech., L.L.C. v. Facebook, Inc., Case No. 18-2356 (Fed. Cir. Oct. 9 2019) (Lourie, J) (Plager, J, concurring).

B.E. filed a patent infringement suit against Facebook. The district court stayed the suit pending inter partes review of all asserted claims by the PTAB. Ultimately, the PTAB found the asserted claims of B.E.’s patent to be unpatentable. The Federal Circuit subsequently affirmed the PTAB’s finding. The district court dismissed B.E.’s patent infringement claims as moot, found Facebook to be the “prevailing party” and awarded costs under Rule 54(d). B.E. appealed.

On appeal, B.E. argued that Facebook did not “prevail” because the case was dismissed as moot, and the dismissal “lacked the requisite judicial imprimatur to render Facebook the prevailing party.” Relying on the Supreme Court of the United States’ decision in CRST Van Expedited v. E.E.O.C., Facebook argued that it had successfully rebuffed B.E.’s claims. In CRST, the Supreme Court considered whether, in the context of a statute that allowed fees to the “prevailing party,” a defendant could be declared as such absent a judgment on the merits. The Supreme Court found that a decision on the merits is not a prerequisite to a finding of prevailing party status.

The Federal Circuit agreed with Facebook, relying on CRST’s “common-sense approach,” in which a defendant can be deemed a prevailing party even if a case is dismissed on procedural grounds. The Court explained that identification of a prevailing party requires consideration of whether the district court’s decision rebuffs a plaintiff’s attempt to effect a “material alteration in the legal relationship between the parties.” In affirming the district court, the Federal Circuit found that Facebook, via inter partes review before the PTAB, successfully rebuffed B.E.’s claims, and that the district court’s dismissal for mootness placed the requisite judicial imprimatur upon the claims.


PATENTS / AIA / CERTIFICATE OF CORRECTION / PTAB

Only Director May Decide Merits of Certificate of Correction


Jiaxiao Zhang

Addressing limitations on the role of the Patent Trial and Appeal Board (PTAB), the US Court of Appeals for the Federal Circuit explained that the PTAB erred in rejecting a patent owner’s request to file a request for a certificate of correction because only the director has authority to make that determination. Honeywell Int’l Inc. v. Arkema Inc., Case Nos. 18-1151, -1153 (Fed. Cir. Oct. 1, 2019) (Reyna, J).

Honeywell owns a patent directed to fluoroalkene compounds used in refrigeration systems and other applications. Honeywell’s patent issued in 2015 and recites a chain of priority applications dating back to 2002. Arkema filed a petition for post-grant review (PGR) of Honeywell’s patent. Arkema argued that the priority applications listed on the face of the patent did not provide written description support for the issued claims, and that the patent therefore was not entitled to its 2002 priority date. Removing the 2002 priority date as the effective filing date and relying on the 2014 actual filing date would make the patent PGR-eligible since PGR is only available for patents having at least one claim with an effective filing date on or after March 16, 2013. If Honeywell’s patent was entitled to the 2002 priority date, however, the patent would be statutorily ineligible for PGR.

In its preliminary patent owner statement, Honeywell argued that the patent claims were supported by at least a 2004 priority date and PGR was thus improper. The PTAB rejected Honeywell’s argument and instituted the PGR proceedings. After institution, Honeywell requested permission from the PTAB to file a motion for leave to request a certificate of correction from the US Patent and Trademark Office (PTO) director so that Honeywell could amend the patent’s priority claim. Honeywell asserted that when it filed a preliminarily amendment during prosecution, it inadvertently failed to make corresponding amendments to the list of priority applications. Honeywell explained that its proposed correction would include an additional Honeywell patent that conferred a different priority benefit, under which the patent would be ineligible for PGR.

Under 35 USC § 255, patentees may petition the director to issue a certificate of correction to correct “a mistake of a clerical or typographical nature, or of minor character, which was not the fault of the Patent and Trademark Office,” in an issued patent. The patentee must show that the mistake “occurred in good faith” and that “the correction does not involve such changes in the patent as would constitute new matter or would require re-examination.”

In two telephonic conferences with the PTAB regarding its request, Honeywell conceded that its mistake was neither clerical nor typographical, but maintained that a priority claim could be changed through a certificate of correction. Arkema refuted the “minor character” and propriety of Honeywell’s request, claiming that such correction would be “extremely prejudicial” because Arkema’s window to re-file a PGR with different art had closed. The PTAB agreed with Arkema and rejected Honeywell’s request for authorization to file a motion for leave. The PTAB subsequently issued a final written decision holding the patent claims unpatentable. Honeywell appealed.

Under the Administrative Procedure Act, if agency actions, findings and conclusions are found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” they are unlawful and set aside. The PTAB abuses its discretion if the decision:

  • Is clearly unreasonable, arbitrary or fanciful
  • Is based on an erroneous conclusion of law
  • Rests on clearly erroneous fact findings
  • Involves a record that contains no evidence on which the PTAB could rationally base its decision.

The Federal Circuit found that the PTAB abused its discretion by assuming the authority that § 255 expressly delegates to the PTO director—i.e., to determine when a certificate of correction is appropriate. Rather than sub-delegating any statutory authority, the director properly promulgated steps by which patentees may seek the PTAB’s leave to petition for a certificate of correction:

  • Seek authorization from the PTAB to file a motion
  • If authorization is granted, file a motion asking the PTAB to cede its exclusive jurisdiction so that the patentee can seek a certificate of correction from the director
  • If the motion is granted, petition the director for a certificate of correction.

Only at the third step would the director—not the PTAB—evaluate the merits of the patentee’s petition, including whether the mistake is of “minor character” or “occurred in good faith.” In keeping with Congress’s intent that America Invents Act post-issuance proceedings provide the PTO with an “enlarged opportunity to correct its errors in granting a patent,” the appropriate standard of review by the PTAB is to “determine whether there is sufficient basis supporting Patent Owner’s position that the mistake may be correctable.”

The Federal Circuit also found that the PTAB lacked the information necessary to make a reasoned decision as to the proposed correction, including whether the mistake was inadvertent or whether there was any prejudice to Arkema. The PTAB also failed to provide an explanation or reasoned basis for its decision, such that the Court could not meaningfully review the parties’ prejudice arguments. Accordingly, the Court vacated the PTAB’s final written decision and remanded to the PTAB to authorize Honeywell to file a motion seeking leave to petition the director for a certificate of correction, to review Honeywell’s motion for leave, and to evaluate whether prejudice to Arkema requires accommodation.


PATENTS / MOTION TO DISMISS

Patent Sublicense Does Not Automatically Survive Termination of Principal License


Alexander P. Ott

The US Court of Appeals for the Federal Circuit reversed a dismissal based on a license defense, explaining that it was improper to dismiss until the district court had interpreted the license agreement. Fraunhofer-Gesellschaft zur Fӧrderung der angewandten Forschung E.V. v. Sirius XM Radio Inc., Case No. 18-2400 (Fed. Cir. Oct. 17, 2019) (Reyna, J).

In 1998, Fraunhofer entered into an agreement granting exclusive licensing rights to its patents, which covered multicarrier modulation in communication signals, to a company named WorldSpace. Under the agreement, WorldSpace could grant sublicenses and in exchange was obligated to make payments to Fraunhofer for patent prosecution expenses. The next year, WorldSpace granted Sirius a sublicense to practice the patents. WorldSpace entered bankruptcy proceedings in 2008, during which it rejected its agreement with Fraunhofer and stopped making payments.

In 2015, Fraunhofer sent a letter to WorldSpace noting that the agreement had already been terminated during the bankruptcy proceeding, and terminating the agreement again for good measure. Two years later, Fraunhofer sued Sirius for alleged infringement of four of its multicarrier modulation patents. Sirius filed a motion to dismiss for failure to state a claim based on its sublicense from WorldSpace. The district court cited a previous Federal Circuit case for the proposition that a patent sublicense automatically survives termination of the principal license, and on that basis granted the motion to dismiss. Fraunhofer appealed.

The Federal Circuit disagreed that its previous case set forth a rule that sublicenses automatically survive termination, and explained that termination was a matter of contract interpretation. The Court concluded that Fraunhofer’s agreement was ambiguous and consequently reversed the district court’s dismissal with instructions to interpret the contract in view of the extrinsic evidence. The Federal Circuit also questioned whether Fraunhofer’s agreement had actually been terminated. Since the district court had not needed to address this issue in the first instance, the Federal Circuit instructed the district court to consider it on remand.


PATENTS / EUROPE

CJEU Rules on Damages for Unjustified Preliminary Injunctions in “Launch at Risk” Cases


Dr. Henrik Holzapfel | Dr. Philip Uecker

The Court of Justice of the European Union (CJEU) recently handed down its judgment in a case concerning the circumstances under which an intellectual property (IP) right holder is liable for damages caused by a preliminary injunction granted to enforce the relevant IP right, if the grant of the preliminary injunction was unjustified. Bayer Pharma AG v. Richter Gedeon Vegyészeti Gyár Nyrt. and Exeltis Magyarország Gyógyszerkereskedelmi Kft, Case No. C-688/17 (CJEU Sept. 12. 2019). The CJEU rendered its decision construing Article 9 (7) of European Directive 2004/48/EC on the Enforcement of Intellectual Property Rights, a section of the European Directive that is identical to Article 50 (7) of the TRIPS agreement.

Richter and Exeltis, Hungarian manufacturers of generic drugs, claimed damages from Bayer, arguing that a preliminary injunction had been wrongly granted against them. A fierce battle ensued, with back and forth between instances of Hungarian courts and the Hungarian patent office, from which Bayer had requested a preliminary injunction against Richter and Exeltis. The patent office initially granted the preliminary injunction but lifted it after an appeal, because the preliminary injunction was found to be disproportionate to the alleged harm. After the preliminary injunction was lifted, the Bayer patent in suit was found to be invalid in the course of invalidity proceedings initiated by Richter and Exeltis. Richter and Exeltis had not sought invalidation of Bayer’s patent prior to the launch of their generic products, however. Instead, they launched their products “at risk,” even before the grant of the relevant patent (but after the patent application was filed).

In its defense against Richter and Exeltis’s claims for damages, Bayer argued that the generics companies had caused their own losses by intentionally and unlawfully launching their products. In that context, the referring Hungarian court asked whether Article 9 (7) of European Directive 2004/48 precluded Hungarian national law from providing that a party shall not be entitled to claim damages it suffers as a result of failing to reasonably act to avoid or mitigate damages.

In its judgment, the CJEU emphasized that patentees should not be discouraged from applying for a preliminary injunction for fear of later damages claims arising against them using the injunction as the sole basis for the alleged damages. European Directive 2004/48 is intended to ensure a high level of protection for IP rights. According to the CJEU, the mere fact that a preliminary injunction was applied for, or was wrongly granted, does not automatically give rise to damages claims against the preliminary injunction applicant. However, the CJEU somewhat vaguely noted that damages claims may be possible when the party applying for a preliminary injunction has been shown to have “abused” preliminary injunction as a remedy.

In order to determine whether an application for a preliminary injunction is abusive, the CJEU requires national courts to take into account all the objective circumstances of a case, including the parties’ conduct. In this context, the CJEU seems to imply that if a party launches an infringing product at the risk of infringing a granted patent, that conduct may be regarded as objectively indicating the risk of irreparable harm suffered by the patentee and hence as indication of a need for a preliminary injunction. In any event, the Court found that national law may exclude claims for damages that a party has suffered if the enjoined party has not acted reasonably in order to avoid or mitigate damages.

Practice Note: This judgment has the potential to shift the risks connected with a launch at risk in the European Union to the launching company and away from the IP right holder. If the IP right holder applies for a preliminary injunction, it may now face a lower risk of later being found liable for damages to an alleged infringer.

German national law has had a stricter approach to an award of damages for unjustified preliminary injunctions. Under § 945 of the German Code of Civil Procedure, a later cancellation of the IP right asserted in preliminary injunction proceedings will usually trigger a claim for damages suffered by a wrongly enjoined party. It remains to be seen whether this CJEU judgment will alter this practice and make preliminary injunction proceedings in Germany more attractive for IP right holders. In any event, it may still be possible to argue that the circumstances of a case that should be considered in relation to damages claims include the known risk of applying for a preliminary injunction where the alleged infringer has challenged, or has indicated it may challenge, the validity of the asserted IP right.


PATENTS / SUBJECT MATTER ELIGIBILITY

PTO Releases Patent Eligibility Guidance Update


Bernard P. Codd

On October 18, 2019, in view of comments received, the US Patent and Trademark Office (PTO) issued an update to the 2019 Patent Eligibility Guidance (PEG), which became effective January 2019. The update is similar to the 2019 PEG in that the two-step test is used to determine subject matter eligibility. However, the update includes additional examples applying the subject matter eligibility test. The update also includes three appendices:

  • Appendix 1 provides four new examples that are illustrative of major themes from the comments.
  • Appendix 2 is a comprehensive index of examples, including examples issued prior to the 2019 PEG.
  • Appendix 3 lists and discusses selected Supreme Court and Federal Circuit patent eligibility cases.

The PTO grouped the comments into the following five major themes:

  • Evaluation of whether a claim recites a judicial exception at step 2A Prong One
  • Groupings of abstract ideas enumerated in the 2019 PEG
  • Evaluation of whether a judicial exception is integrated into a practical application at Step 2A Prong Two
  • Requirements of a prima facie case
  • Application of the 2019 PEG in the examining corps.

The update includes sections discussing each of these themes. The first section defines the term “recites” and provides guidance for examiners when determining whether a claim recites a judicial exception. The first section also explains that a claim can recite multiple distinct judicial exceptions (e.g., an abstract idea and a law of nature).

The second section further clarifies the terms “mathematical relationships,” “mathematical formulas or equations,” and “mathematical calculations.” It explains the meaning of “certain” in “certain methods of organizing human activity,” and “fundamental” in “fundamental economic practices or principles.” The second section also provides guidance on “commercial or legal interactions,” “managing personal behavior or relationships or interactions between people,” and “mental processes.” The update notes that claims that require a computer may still recite a mental process.

In the third section, the update includes a new mini-flowchart to depict the two-prong analysis that is performed in Step 2A of the eligibility flowchart illustrated in MPEP 2106(III). The third section provides further clarification on consideration of improving the functioning of a computer or other technology, and treatment or prophylaxis of a disease or medical condition. The update also explains that whether a claim limitation is well known, routine or conventional is a consideration under Step 2B.

In section four, the update details the analysis an examiner should provide in order to establish a prima facie case when making a subject matter eligibility rejection, and in section five discusses the PTO’s subject matter eligibility guidance materials and summarizes examiner training and applicant options for responding to a subject matter eligibility rejection.

The PTO appears to be dedicated to assisting applicants in claiming eligible subject matter within the confines of Supreme Court precedent. The PTO continues to welcome feedback on the 2019 PEG or any other patent eligibility issue.


America Invents Act

AIA / PTAB PRACTICE / OBVIOUSNESS

PTAB Designates Obvious Design Choice Opinion as Informative


Brian A. Jones

The Patent Trial and Appeal Board (PTAB) designated as informative the decision in Ex parte Spangler, Appeal No. 2018-003800 (PTAB Feb. 20, 2019) (Bahr, APJ) (designated informative on Oct. 15, 2019), where the PTAB affirmed the examiner’s obviousness rejection based on design choice. The PTAB agreed with the examiner that the difference between the prior art and the claims would have been a simple design choice to one of skill in the art. Because the applicants failed to identify a stated problem/solution relating to the differentiating feature or any particular purpose for the differentiating feature, the PTAB agreed that the feature would have been an obvious design choice.

The applicants’ claims were directed to a featherseal for engagement with a turbine engine. The claimed featherseal included a particular arrangement of tabs that engage and seat in corresponding slots to axially position and retain the featherseal. Using a combination of two prior art references, the examiner found that it would have been obvious to add tabs from one prior art reference to the featherseal of another prior art reference in order to axially position the featherseal. The applicants did not appeal this portion of the examiner’s rejection.

The combination of prior art did not disclose the particular arrangement and relative size of tabs as recited in the claims, however. The examiner found that the claimed relative size and positioning of the tabs would have been a simple design choice because any arrangement or size would yield the expected result of axially positioning the featherseal. The applicants argued that the particular arrangement of the tabs was a “critical” feature, and pointed to various disclosures in the specification describing the benefits of the tabs. The PTAB agreed with the examiner that the tabs in any configuration would provide these benefits, and the relative sizes and particular locations of the tabs were immaterial to achieving the described benefits. The specification’s failure to disclose that the relative lengths and locations of the tabs solved any stated problem or were for any particular purpose confirmed that it would have been an obvious matter of design choice to resize and reposition the tabs, and would yield the predictable result of preventing axial movement.

The applicants also pointed to the prior art’s teaching of symmetric tabs—an arrangement contrary to the claimed asymmetric arrangement. The PTAB rejected this argument because although the prior art identified a symmetric arrangement as the preferred one, the reference taught asymmetric arrangements, all of which would have had the same benefit of properly positioning and seating the device. Accordingly, the PTAB affirmed the examiner’s rejection based on an obvious design choice.


Trademarks

TRADEMARKS / ATTORNEYS’ FEES

No Shelter for Willful Infringement of Distributor’s Trademarks


Katie Bukrinsky

The US Court of Appeals for the Seventh Circuit affirmed a district court’s finding of trademark infringement and award of damages against a manufacturer of storm shelters and its owner, and went a step further by ordering the district court to also award the plaintiff reasonable attorneys’ fees. 4SEMO.com Inc. v. Southern Illinois Storm Shelters, Inc. et al., Case Nos. 18-1998, 19-2095 (7th Cir. Oct. 7, 2019) (Sykes, J).

Southern Illinois Storm Shelters (SISS) manufactures storm shelters. 4SEMO.com Inc. is a home-remodeling firm that purchased storm shelters from SISS and installed them for 4SEMO’s customers. In 2005, 4SEMO secured from SISS an exclusive right to sell SISS-manufactured storm shelters in parts of Missouri and Arkansas. 4SEMO created a trademark, LIFE SAFER STORM SHELTERS, and a logo to market and sell the storm shelters:

In 2006, SISS sought a license from 4SEMO to use the LIFE SAVER STORM SHELTERS marks to market its storm shelters in other geographical areas. 4SEMO granted an oral license with certain conditions, which SISS proceeded to ignore for many years. Discovery revealed that SISS’s intent all along was to use 4SEMO’s trademarks for nationwide sales without abiding by the oral license until 4SEMO discovered the infringement, and to then offer to purchase the marks.

When 4SEMO learned of SISS’s years of infringement, SISS attempted to execute its plan, but negotiations broke down. In 2013 SISS sued 4SEMO for trademark infringement, alleging that SISS had used the LIFE SAVER STORM SHELTERS mark for years before 4SEMO began to use the mark. 4SEMO counterclaimed for trademark infringement, breach of contract, civil conspiracy and other claims.

After SISS’s claims were proved baseless and dismissed via summary judgment, the district court held a bench trial on 4SEMO’s counterclaims and found in favor of 4SEMO. Turning to damages, the judge found that 4SEMO’s expert proved that SISS had approximately $17.4 million in revenues from its decade of infringing sales. Because SISS had not challenged 4SEMO’s expert’s calculations and had affirmatively waived its right to prove its costs, the district court awarded the entire $17.4 million of infringing revenues to 4SEMO. The court declined, however, to award 4SEMO its attorneys’ fees under 15 USC § 1117(a). Both parties appealed.

On appeal, SISS offered two novel legal theories. First, it argued that 4SEMO’s LIFE SAVER STORM SHELTERS logo was illegal because it violated a federal criminal statute, 18 USC § 706, that reserved the emblem of a red Greek cross on a white ground exclusively for the American Red Cross. The Seventh Circuit disposed of this theory, holding that 4SEMO’s logo, which featured a red cross with large yellow lettering, on a black background, sufficiently distinguished the mark from the American Red Cross logo. Second, citing Professor McCarthy’s treatise, SISS argued that in “the absence of an agreement defining ownership [there is a] rebuttable presumption that the manufacturer of [the] goods is the owner of the trademark of those goods.” SISS argued that because it was the manufacturer of the storm shelters, it was presumed to own the marks used to promote this product. The Seventh Circuit noted that this argument was waived because it was first raised on appeal, and found that the argument also failed because the “initial ownership” of the LIFE SAVER marks was not in dispute. The district court had found—and SISS did not dispute on appeal—that 4SEMO had first created and adopted the marks. Thus, Professor McCarthy’s rebuttable presumption and corresponding factors were not relevant to the situation.

The Seventh Circuit affirmed the award of SISS’s entire revenues as disgorged profits, holding that SISS had effectively conceded 4SEMO’s expert’s calculations and waived its right to prove any deductions. The Court found no error in the district court’s holding that SISS, its corporate owner (Ingoldsby Excavating) and that company’s owner (Bob Ingoldsby) were jointly and severally liable for these damages. The Court noted the district court’s factual findings that Bob Ingoldsby failed to maintain any corporate formalities in terms of his companies. The Seventh Circuit then took the matter a step further. Noting the district court’s factual finding that SISS and its owner’s infringement was “willful, egregious, [] intentional” and “malicious[],” the Seventh Circuit held that the district court’s refusal to find this to be an “exceptional case” deserving of an award of attorneys’ fees was an abuse of discretion. The Seventh Circuit reversed the denial of attorneys’ fees and remanded the case for entry of a reasonable fee award.

Practice Note: While it is rare for an appellate court to find that a district court abused its discretion in denying attorneys’ fees under § 1117, that is exactly what happened here. The Seventh Circuit explained that the factual findings that SISS’s conduct was “willful,” “egregious,” “intentional” and “malicious” mandated a finding that the case was exceptional under Octane Fitness v. ICON Health & Fitness. Defendants in the Seventh Circuit should take care to strongly contest any factual findings of willfulness or maliciousness, or risk a similar result.


Copyrights

COPYRIGHTS / KNOW-HOW TRANSFER

Transfer of “Know-How” Includes Copyrights


Jodi Benassi

The US Court of Appeals for the Sixth Circuit vacated the district court’s dismissal of trademark and false advertising claims and grant of summary judgment on a copyright claim. Evoqua Water Technologies, LLC v. M.W. Watermark, LLC; Michael Gethin, Case Nos. 18-2397, -2398 (6th Cir. Oct. 7, 2019) (White, J) (Bush, J, concurring).

Evoqua and Watermark manufacture and sell sludge dryers and filter presses that remove water from industrial waste. Evoqua had acquired the assets of a corporation called JWI through a series of mergers and acquisitions. Michael Gethin formerly worked at JWI and left his position in 2003 to form Watermark (formerly known as J-Parts LLC). Evoqua’s predecessor had acquired JWI’s business “know-how,” contracts, trademarks and interest in litigation.

Shortly after Gethin formed Watermark, JWI sued Gethin and Watermark for false designation of origin, trademark dilution, trademark infringement, unfair competition, unjust enrichment, misappropriation of trade secrets, breach of fiduciary duties, breach of contract and conversion. The parties settled, and the court entered a final judgment, including a permanent injunction that prevented Watermark and Gethin from using JWI’s trademarks or proprietary information.

In 2014, Evoqua announced that it would discontinue its sludge dryer product line. In response, Watermark decided to enter the sludge dryer market and announced that it was releasing a new sludge dryer product. In 2015, Evoqua began plans to reintroduce its sludge dryer to the market.

Evoqua sued Watermark in 2016, alleging that Watermark and its employees violated the 2003 judgment by using Evoqua’s proprietary information and infringing on its trademarks. Evoqua alleged that Watermark infringed on its copyrights by adopting Evoqua’s copyrighted brochures and presentations for its own use. Evoqua asserted that Watermark impermissibly used its J-MATE® trademark on its website and adopted a confusingly similar name of “DryMate” for its own product. Evoqua also alleged that Watermark falsely advertised itself as an original equipment manufacturer for Evoqua’s products. The district court agreed with Evoqua, but before the award was issued, the case was reassigned to a different judge. The new judge determined that the judgment in the 2003 case did not provide for enforcement by an assignee, and therefore Evoqua did not have standing. The court further found that the agreement between Evoqua and its predecessor did not transfer copyright ownership to Evoqua. Thus the court granted Watermark’s motion for summary judgment. Evoqua appealed.

The Sixth Circuit first noted that although the consent decree was silent on the question of assignability, under Michigan law mere silence on this question does not evince an intent to prohibit assignment. The Court found that because the 2003 judgment did not contain an anti-assignment clause or some other clear prohibition on assignment, the judgment could be assigned.

With respect to the copyright claims, the Sixth Circuit had to determine whether the copyrights had been properly assigned to Evoqua in the carve-out agreement between Evoqua and its predecessors. The Court analyzed the issue under Delaware law, pursuant to the choice-of-law provision in the agreement. Although copyrights were not expressly discussed in the agreement, Evoqua argued that the “know-how” clause transferred the copyrights to it. The Court determined that the agreement was susceptible to two different interpretations, however, and therefore was ambiguous. The Court pointed out that “all information and data,” as used in the agreement, could encompass a wide variety of assets, including copyrights. Because the language of the agreement was ambiguous, the Court looked outside the contract to determine the parties’ intent. Evoqua presented affidavits from its predecessors asserting that it was the parties’ intent to sell the copyrights. The Sixth Circuit found this evidence sufficient to defeat summary judgment, explaining that because the intent of the parties was a disputed issue of material fact, the district court improperly granted summary judgment on that basis.


Cert Alerts

COPYRIGHTS / SOFTWARE

TRADEMARKS / GENERIC MARKS

Supreme Court to Consider When a Mark Is Too Generic for Protection


Paul Devinsky

The Supreme Court of the United States granted certiorari on a petition filed by the US Patent and Trademark Office (PTO) seeking to overturn a district court decision in favor of Booking.com. The PTO argues that the mark is too generic to be accorded trademark protection. U.S. Patent and Trademark Office et al. v. Booking.com BV, Case No. 19-46 (Supr. Ct. Nov. 8, 2019) (cert granted).

After the PTO refused registration of the mark “Booking.com” on the grounds that the name was generic, a district court ruled that the addition of “.com” made the otherwise generic mark a protectable trademark. The US Court of Appeals for the Fourth Circuit affirmed that ruling (IP Update, Vol. 22, No. 23).

According to the Fourth Circuit “[w]hen ‘.com’ is combined with [another term], even a generic [other term], the resulting composite may be non-generic where evidence demonstrates that the mark’s primary significance to the public as a whole is the source, not the product.”

In its petition, the PTO argued that the addition of “.com” to a generic word does not render it distinctive and that the Fourth Circuit ruling could allow aggressive entities to lock up generic terms—English language expressions that should be free for all to use.

The issue presented is: Whether, when the Lanham Act states generic terms may not be registered as trademarks, the addition by an online business of a generic top-level domain (“.com”) to an otherwise generic term can create a protectable trademark.