IP Update, Vol. 21, No. 12 - McDermott Will & Emery

IP Update, Vol. 21, No. 12





Specific Functions Improving Computer Technology Are 101-Eligible, Unconventionality Not Required

In two recent decisions, judges of the US Court of Appeals for the Federal Circuit expounded on the standards under which software-related patent claims are subject matter eligible under 35 USC § 101. Ancora Techs. v. HTC Am., Inc., Case No. 18-1404 (Fed. Cir. Nov. 16, 2018) (Taranto, J); CyWee Grp. Ltd. v. Samsung Elecs. Co., Case No. 2:17-CV-140-WCB (E.D. Tex. Nov. 7, 2018) (Bryson, J, sitting by designation).

In Ancora, HTC moved under § 12(b)(6) to dismiss Ancora’s infringement action, arguing that the asserted claims were invalid as patent ineligible under § 101. Section 101 defines patent-eligible subject matter as “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Laws of nature, natural phenomena and abstract ideas are ineligible. After the district court determined that the claims were directed to an abstract idea and dismissed the action, Ancora appealed to the Federal Circuit.

The patent in issue was for “Restricting Software Operation Within a License Limitation” and taught that among “[n]umerous methods . . . for the identifying and restricting of an unauthorized software program’s operation,” software-based methods require writing a license signature on the computer’s hard drive, and hardware-based methods require inserting a costly and inconvenient software-authentication dongle. The patent’s self-described improvement embeds a non-removable, non-modifiable unique identification code “key” in the read-only memory of the computer’s Basic Input Output System (BIOS) module. Each application program licensed to run on the computer is associated with a license record (author and program names, and number of licensed network users). Storing this license record in a “verification structure” created in a portion of BIOS memory that “may be erased or modified” uses “existing computer hardware (eliminating [additional] expense and inconvenience . . . while storing the verification information in a space that is harder and riskier for a hacker to tamper with than storage areas used by earlier methods.”

  • The district court granted HTC’s motion to dismiss after concluding that under the two-step Alice/Mayo analysis (IP Update, Vol. 17, No. 7), the claims:
    Focused “on the abstract concept of selecting a program, verifying whether the program is licensed, and acting on the program according to the verification”
  • Contained no “inventive concept” of something significantly more than the abstract idea because “[s]pecifying that the BIOS be used to house the verification structure” calls for nothing more than “[s]toring data in the memory of a computer component that generally stores data”

On de novo review, the Federal Circuit reversed.

The panel first considered whether, under Alice step one, the district court correctly characterized the “‘claimed advance’ in the process of determining whether the claims were directed to an abstract idea” (citing Finjan quoting Enfish, regarding software innovations where the eligibility issue turns on “whether the claims focus on ‘the specific asserted improvement in computer capabilities . . . or, instead . . . computers are invoked merely as a tool.’”) In this case, the Federal Circuit analogized the invention to those at issue in Finjan, Enfish, Visual Memory, Core Wireless and Data Engine. The Court found that the claimed method specifically identified how the non-abstract computer-functionality improvement is effectuated, and therefore concluded that the claim was not directed to an abstract idea.

The Ancora case was decided on the heels of a decision rendered just a week earlier by Federal Circuit Judge William C. Bryson (sitting by designation) in the Eastern District of Texas in CyWee v. Samsung Elecs. In CyWee, Samsung moved for summary judgment of invalidity under § 101 against patents asserted by CyWee directed to 3D pointing devices and methods for compensating movement/rotation. Samsung argued that the asserted claims were patent-ineligible because “CyWee’s patent claims merely recite algorithms that operate on data obtained from convention sensors.” Judge Bryson denied the motion, explaining that conventional or unconventional use is not critical to the determination of subject matter patentability.

As Judge Bryson further explained, under Supreme Court of the United States and Federal Circuit precedent (Flook, Diehr, Thales Visionix), while mathematical formulas are not patentable, claims containing mathematical algorithms may be, depending on the role the formula plays: “Claims are patent eligible under § 101 ‘when a claim containing a mathematical formula implements or applies that formula in a structure or process which, when considered as a whole, is performing a function which the patent laws were designed to protect.’”

CyWee’s patent claimed a particular combination of sensors used to gather raw data points relating to an object’s position. Those data points were then used in a mathematical formula to determine the orientation of the object in a spatial reference frame. Judge Bryson emphasized that such equations must be viewed in conjunction with all other claim components to examine what is new and useful (and avoid foreclosing more than necessary). Analogizing to the patent-eligible technologies at issue in Thales and Diehr, Judge Bryson found that the invention defined by CyWee’s apparatus claims performed a specific, useful function by a particular device to have tangible, physical results from the receipt and assessment of information, and that the method claims used inputs from six- and nine-axis sensors to track the orientation status of the 3D pointing device and correct errors associated with conventional motion detectors.

Judge Bryson stressed that although the Federal Circuit recognized the unconventional positioning of the sensors in Thales, this was not critical to patentability (as evidenced by the court determining patent-eligibility without reaching Alice step two). Quoting Diehr, Judge Bryson stated that unconventional use is “additional evidence,” but “[t]he ‘novelty’ of any element or steps in a process, or even of the process itself, is of no relevance in determining whether the subject matter of a claim falls within the § 101 categories.”


Non-Accused Products Are Not a Measure of Patent Damages

Addressing anticipation, inducement and reasonable royalty damages, the US Court of Appeals for the Federal Circuit upheld denials of the accused infringer’s motions for judgment as a matter of law (JMOL) of anticipation and no inducement, but vacated the damages award because the patentee’s damages theory considered non-accused products in the royalty base. Enplas Display Device Corp. v. Seoul Semiconductor Co., Ltd., Case. No. 16-2599 (Fed. Cir., Nov. 19, 2018) (Stoll, J) (Newman, J, concurring-in-part and dissenting-in-part).
Seoul Semiconductor Company (SSC) owns two patents directed to providing uniform backlighting for display panels. SSC and Enplas Display Device (EDD) collaborated to make lenses for SSC’s backlighting devices (light bars). SSC informed EDD that light bars including the lenses were covered by SSC’s patents. Nonetheless, EDD sold the lenses to other light bar manufacturers, and some of the resulting light bars were incorporated in products that were sold in the United States. After SSC sent EDD a cease and desist letter, EDD filed an action for declaratory judgment that the SSC patents were invalid and not infringed. SCC counterclaimed for infringement and sought damages.


The first SSC patent claims a backlighting method involving, among other things, mounting plural light sources on the internal bottom wall of the device. The district court granted summary judgment that the first patent was not anticipated by prior art that disclosed a backlighting method involving light sources disposed around the periphery of the cavity.

The parties tried the issue of anticipation of the second patent. At trial, SSC’s technical expert presented testimony that the alleged prior art did not disclose certain limitations of SSC’s second patent. The jury subsequently returned a verdict that the second patent was not anticipated. EDD moved for JMOL of anticipation, which the district court denied. EDD appealed the summary judgment as to the first patent and the denial of JMOL as to the second.

The Federal Circuit unanimously affirmed both judgments. Regarding the first patent, EDD argued that the prior art permitted the light sources to be disposed around the periphery of the internal bottom wall as opposed to the side walls of the cavity, but the Court characterized this as a modification of the prior art that might support an obviousness theory but could not support anticipation. As to the second patent, the Court determined that SSC’s expert testimony constituted substantial evidence supporting the jury verdict.


At trial, SSC presented evidence that, among other things, EDD was aware of SSC’s patents and aware that it had a 50 percent global market share, including substantial sales in the United States. The jury found that EDD had induced infringement of SSC’s patents. EDD moved for JMOL, which the district court denied. On appeal, EDD argued that its foreign sales of lenses could not evince a specific intent to infringe SSC’s patents in the United States. Unpersuaded, the Federal Circuit unanimously found that EDD’s awareness of its US market share, combined with the other evidence presented, was sufficient evidence—even if circumstantial—for the jury to find that EDD had the requisite specific intent to create direct infringement in the United States. Accordingly, the Court affirmed the denial of JMOL as to inducement.


SSC’s lump-sum reasonably royalties theory was based on the argument that, because EDD sold or might sell potentially infringing (but non-accused) devices, EDD would have sought a freedom-to-operate license for all actually and potentially infringing devices in order to avoid future uncertainty and potential further litigation. According to SSC’s damages expert, the reasonable royalty for the accused devices alone would have amounted to a lump sum of $570 million, but SCC would have paid a premium to secure a freedom-to-operate license, bringing the total sum to between $2 million and $4 million, depending on the volume of potentially infringing devices. EDD brought a Daubert challenge on which the district court deferred judgment, instructing EDD to instead file a motion in limine. EDD moved in limine, but the district court denied the motion. SSC’s expert presented her theory at trial, and the jury returned a damages award of $4 million. EDD moved for JMOL that the award was excessive, which the district court denied. EDD appealed the issue.

On appeal, the majority of the Federal Circuit panel held that SSC’s damages theory was impermissible because it included non-accused products in the royalty base. Thus, the Court held that substantial evidence did not support the jury’s damages award, which the Court vacated.

In dissent, Judge Newman characterized EDD’s appeal of the denial of JMOL (reviewed de novo) as a disguised appeal of the district court’s evidentiary rulings (reviewed for abuse of discretion) and therefore improper. In dicta, Judge Newman further described SSC’s damages theory as a proper reflection of real-world business considerations, which may be considered in the hypothetical negotiation.

Practice Note: It is unclear whether Enplas signals the Court’s willingness to consider the propriety of damages theories under the de novo standard. Counsel deciding whether to appeal a district court’s evidentiary rulings or denial of JMOL should balance the risk of being seen to improperly challenge the wrong issue with the reward of appellate review under a more favorable standard.


Reference Buried in Indexing Blizzard Is Not a Printed Publication

Thomas DaMario

Addressing the post-America Invents Act standard for determining whether a reference qualifies as a printed publication within the meaning of 35 USC § 102(a), the US Court of Appeals for the Federal Circuit upheld a Patent Trial and Appeal Board (PTAB) ruling that the test for public accessibility is not merely whether the reference has been indexed. Acceleration Bay, LLC v. Activision Blizzard Inc., Case Nos. 17-2084, -2085, -2095, -2096, -2097, -2098, -2099, -2117, -2118 (Fed. Cir. Nov. 6, 2018) (Moore, J).

Acceleration Bay owns three patents directed to broadcast techniques in which broadcast channels overlay a point-to-point communications network. Blizzard filed several petitions for inter partes review of the patents. During the proceeding, the PTAB found that the Lin reference, which was cited as prior art, was not a printed publication within the meaning of § 102(a).

In evaluating whether the Lin reference qualified as a printed publication, the PTAB heard testimony from a systems administrator at the computer science and engineering department of the University of California, San Diego, who testified that the Lin reference was uploaded to the library’s website on November 23, 1999, before the critical date of the relevant patents. At the time the reference was uploaded, a report with a unique identifier was created, identifying the year the reference was uploaded and the order in which the reference was uploaded relative to other papers. The PTAB found that users could search the database index by either the author or the year of the report, but that advanced searching by keywords for author, title and abstract fields, while possible, was “unreliable.” Based on these findings, the PTAB found that the Lin reference was not a printed publication under § 102(a). Blizzard appealed.

The Federal Circuit affirmed the PTAB’s decision that the Lin reference was not a printed publication, finding that the reference was not publicly accessible because it was not indexed in any “meaningful way.” The Court relied on the PTAB’s finding that, despite some indexing and search functionality by author or year, there was no evidence as to how many reports were filed in the database in 1999. Thus, an individual could theoretically be sifting through thousands of reports filed that year.

The Federal Circuit also stated that the test for public accessibility is not whether the reference has been indexed, but whether the reference is available such that persons interested and ordinarily skilled in the subject matter or art, exercising reasonable diligence, can locate it. The Court found that under this test, the Lin reference was not a printed publication under § 102(a).

Practice Note: Indexing alone is not enough to show public accessibility. To establish a reference as a printed publication, it is important to look for keyword searching by title or topic, and not just searching by the author or year.


Assignor Estoppel Has No Place in IPR

Thomas DaMario

Addressing the applicability of assignor estoppel to inter partes review (IPR) proceedings, the US Court of Appeals for the Federal Circuit found that Congress’ intent was clear: assignor estoppel does not apply. Arista Networks, Inc. v. Cisco Systems, Inc., Case Nos. 17-1525, -1577 (Fed. Cir. Nov. 9, 2018) (Prost, CJ).

The common law doctrine of assignor estoppel prevents a party that assigns a patent from later challenging the validity of the assigned patent. The doctrine typically arises when an employee assigns a patent to his or her current employer and subsequently leaves the company to work for a competitor. The competitor is typically estopped from challenging the validity of the patent based on its privity with the employee.

David Cheriton assigned a patent on which he was a named inventor to Cisco. After assigning the patent, Cheriton left Cisco and founded Arista Networks. Arista then sought to challenge the validity of the patent in an IPR review proceeding. The Patent Trial and Appeal Board (PTAB) instituted the proceeding, finding that assignor estoppel did not apply to IPR proceedings. Cisco appealed.

The Federal Circuit affirmed the PTAB’s assignor estoppel decision, finding that the language of 35 USC § 311(a) “unambiguously dictates that assignor estoppel has no place in IPR proceedings.” In making this finding, the Court first considered whether the lower court’s decision was reviewable in light of 35 USC § 314(d). Under § 314(d), “[t]he determination by the Director whether to institute an inter partes review under this section shall be final and nonappealable.” Despite this language, the Court relied on its recent en banc decision in Wi-Fi One, LLC v. Broadcom Corp. (IP Update, Vol. 21, No. 2), ruling that the lower court’s decision was reviewable because “assignor estoppel is not focused on particular claims, whereas § 314(a)’s threshold determination is.” The Court noted that assignor estoppel is not “closely related to the preliminary patentability determination or the exercise of discretion not to institute,” and thus the PTAB’s decision was reviewable.

Turning to the merits, the Federal Circuit stated that “as is often the case, [the question before us] is one of congressional intent.” Cisco argued that assignor estoppel is a common-law doctrine that should be presumed to apply to IPR proceedings. While noting that “Congress is understood to legislate against a background of common-law adjudicatory principles,” the Court found that the language of § 311(a) indicates that “a statutory purpose to the contrary is evident” since it indicates that “a person who is not the owner of a patent may file with the Office a petition to institute an inter partes review of the patent.” The Court found that “the plain language of this statutory provision is unambiguous” and that anyone other than the current patent owner may file a petition to institute an IPR.

Practice Note: The Court’s decision effectively makes the PTAB the only jurisdiction where an assignor can challenge the validity of its assigned patent, since both the US International Trade Commission and district courts enforce assignor estoppel.


Federal Circuit Law Governs Waiver or Forfeiture of Patent Venue Rights

Amol Parikh

The US Court of Appeals for the Federal Circuit concluded venue was improper under the patent venue statute as interpreted by the Supreme Court of the United States, finding that the accused infringer did not waive or forfeit its venue rights. In re: Oath Holdings Inc., fka Yahoo Holdings, Inc., Case No. 18-157 (Fed. Cir. Nov. 14, 2018) (per curiam).

In March 2016, AlmondNet, Datonics and Intent IQ (the respondents) sued Oath in the US District Court for the Eastern District of New York (ED NY). Oath conducts business in the state of New York, is incorporated in Delaware, and does not have “a regular and established place of business” in the ED NY within the meaning of 28 USC § 1400(b), the venue provision for patent cases. In July 2016, Oath filed a motion to dismiss for failure to state a claim, but did not include a venue objection. In January 2017, Oath withdrew its motion to dismiss and filed its answer, admitting that venue was proper but expressly reserving the right to challenge venue based on any change in law, including the then-pending TC Heartland case before the Supreme Court of the United States.

In May 2017, the Supreme Court issued its decision in TC Heartland, holding that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute” (IP Update, Vol. 20, No. 5). On June 12, 2017, Oath moved to dismiss for improper venue because it did not reside or have a regular and established place of business in the ED NY. The respondents opposed, arguing that Oath waived its venue defense because the defense was available in July 2016 when Oath filed its initial motion to dismiss. The district court agreed, finding that Oath waived its venue challenge, and therefore denied Oath’s motion.

Oath petitioned the Federal Circuit for a writ of mandamus that would direct the district court to grant the motion to dismiss. While the petition was pending, the Federal Circuit ruled in In re: Micron (IP Update, Vol. 20, No. 12) that TC Heartland was a change in law and that TC Heartland’s interpretation of the patent venue statute was not available prior to the Supreme Court decision. The Federal Circuit noted, however, that a venue defense might nevertheless have been forfeited if there was a delay in asserting it. The Court denied Oath’s petition in light of Micron, finding that the proper course was for Oath to move the district court for reconsideration.

Oath moved the district court for reconsideration. The district court denied the motion, finding that TC Heartland did not change the law at the Supreme Court level because it reaffirmed Supreme Court precedent. Oath then filed a second petition for mandamus, asking the Federal Circuit to direct the district court to dismiss the action.
The Federal Circuit found that there was no dispute that in the case at bar, venue in the ED NY was improper under § 1400(b), so the only issue was whether Oath waived or forfeited its venue defense by waiting too long to invoke it. The respondents argued that Micron did not apply because the Federal Circuit decided the case under First Circuit law, while the present case arose under Second Circuit law. The Court rejected this regional circuit argument, finding that the interpretation of the patent venue statute is a matter of Federal Circuit law, and waiver and forfeiture of patent venue rights are therefore governed by Federal Circuit law. On this point, the Court found that Oath did not waive its patent venue rights.

The respondents also argued that Oath forfeited its venue defense because it did not object to venue in its answer and extensively participated in the litigation before the TC Heartland decision came down. The Federal Circuit rejected this argument, finding that Oath could not be faulted for waiting to present a venue objection until after TC Heartland was decided, where (1) the case was in an early stage, (2) the defense could not properly have been adopted by the district court at the time Oath answered, and (3) Oath’s answer expressly put the respondents and the district court on notice that it would assert a venue defense if it became available under TC Heartland. The Court noted that Oath filed its motion to dismiss within 21 days of the Supreme Court’s TC Heartland decision and that the respondents had not shown that judicial economy supported forfeiture of venue rights since the case was nowhere close to trial. The Court thus directed the district court to dismiss or transfer the case to a court having appropriate venue.


Where Product Materially Changed, Collateral Estoppel Is Stamped Out

Paul Devinsky

In its third ruling in an ongoing patent dispute, the US Court of Appeals for the Federal Circuit found that a grant of summary judgment barring an infringement action under the principle of collateral estoppel was legal error where the accused product was materially different from product accused in a prior suit. Arcelormittal Atlantique v. AK Steel Corp., Case No. 17-1637 (Fed. Cir. Nov. 14, 2018) (Reyna, J).

In 2010, Arcelormittal initiated an infringement action against AK Steel Corp over its AXN products—steel sheets that, when thermally treated, such as via hot stamping, become highly mechanically resistant and are useful in manufacturing automobile parts. The patent at issue in the 2010 action included claims directed to steel sheets with a certain coating and composition that have “a very high mechanical resistance in excess of 1500 MPa after thermal treatment.” A jury found that AK Steel’s products did not meet the claim element relating to the high mechanical resistance in excess of 1500 MPa after thermal treatment.

In 2013, Arcelormittal initiated another infringement action against AK Steel, this time accusing AK Steel’s ULTRALUME products of infringement. AK Steel defended, seeking summary judgement that the accused products in the 2013 action were the same as those in the 2010 action and that Arcelormittal should be collaterally estoppel from bringing the second infringement action. The district court agreed and dismissed the second action on grounds of collateral estoppel. Arcelormittal appealed.

According to the Federal Circuit, where an alleged infringer prevails in an earlier action, the accused products gain non-infringing status and the alleged infringer acquires the status of a non-infringer to the extent that the accused products remain the same. Thus, “[a] primary issue in a collateral estoppel analysis with respect to non-infringement is whether the accused product is the same—i.e., the issue sought to be precluded is the same as that involved in the prior action—or whether the accused products have materially changed.”

Drawing all inferences in favor of the non-moving party in a summary judgment determination (in this case, Arcelormittal), the Court found that there was sufficient evidence to indicate that AK Steel’s products in the 2013 action were different than the products in the 2010 action, and further that the difference was material, as there was evidence that went to the issue of whether the 2013 products could meet the “very high mechanical resistance [numerically recited in the claims] after thermal treatment.” The Court thus vacated and remanded the case to the district court.


Declaratory Judgment Action Tabled for Lack of Personal Jurisdiction

Sarah P. Hogarth

Addressing the requisite minimum contacts for personal jurisdiction over a patent owner, the US Court of Appeals for the Federal Circuit affirmed the dismissal of a patent infringement declaratory judgment action and related state law claim. Maxchief Invs. Ltd. v. Wok & Pan, Ind., Inc., Case No. 18-1121 (Fed. Cir. Nov. 29, 2018) (Dyk, J).

Maxchief and Wok & Pan both have their principal places of business in China and compete in the market for plastic folding tables. Maxchief distributes its plastic folding tables through Meco Corporation located in Greenville, Tennessee, which distributes the tables through retailers, including Staples, Inc.
Wok & Pan sued Staples in the Central District of California in February 2015, alleging that Staples’ sales of a Maxchief folding table infringed certain Wok & Pan patents. In response, Maxchief filed suit in the Middle District of Tennessee seeking declarations of non-infringement and invalidity and recovery on a state law claim of tortious interference with business relations arising out of Wok & Pan’s patent enforcement activities.

The Tennessee district court dismissed Maxchief’s declaratory judgment claims for lack of personal jurisdiction because Wok & Pan had not sought to enforce its patents in the state of Tennessee. The district court also dismissed Maxchief’s state law tortious interference claim for lack of subject-matter jurisdiction, finding no independent jurisdictional grant over the claim. Maxchief appealed.

The Federal Circuit affirmed, agreeing that the district court lacked personal jurisdiction over the declaratory judgment claims. Specifically, the Court reaffirmed its rule that for a state to have personal jurisdiction over a patent owner in a declaratory judgment action, the patent owner must have engaged in “some enforcement activity in the forum state.” The Court rejected Maxchief’s argument, based on Calder v. Jones, that the “effect” of Wok & Pan’s California lawsuit against Staples would reverberate to Meco in Tennessee and thereby created Wok & Pan’s minimum contacts. The Court also rejected Maxchief’s argument that Wok & Pan created minimum contacts by sending a notice letter alleging infringement by a Kansas company to Maxchief’s Tennessee-based lawyer. The Court considered the letter to be a contact with Kansas, referring to its line of cases holding that a notice letter sent to a lawyer in the forum state does not qualify as activity directed at the forum state where the alleged infringer does not operate in the state.

The Federal Circuit also affirmed the dismissal of the tortious interference claim on the alternative ground that the district court lacked personal jurisdiction over the declaratory judgment defendant. The Court observed in a footnote that the Tennessee court’s conclusion that it lacked subject matter jurisdiction may have been in error, suggesting that a state law claim based on false statements about a patent could suffice to confer jurisdiction under 28 USC § 1338. However, the Court explained that tortious interference claims predicated on false allegations of patent infringement must satisfy the same personal jurisdiction rules as those for declaratory judgment claims, i.e., the patent owner must purposefully direct enforcement activities at the forum state. Because Wok & Pan had not done so, the Tennessee court lacked personal jurisdiction.

Practice Note: Selecting a desirable forum is an important consideration in bringing any lawsuit. More important, however, is selection of a proper one. Jurisdictional issues can be costly to litigate and can result in the dismissal of claims years later and after full merits litigation.


ITC May Reassess Civil Penalty Even If Asserted Claims Are Later Invalidated

Alexander P. Ott

Addressing a US International Trade Commission (ITC) decision refusing to reassess its imposition of a civil penalty for a violation of a consent order, the US Court of Appeals for the Federal Circuit held that its earlier decision affirming the civil penalty did not bar reconsideration of that penalty in view of a later invalidity finding. DBN Holding, Inc. v. ITC, Case No. 17-2128 (Fed. Cir. Nov. 27, 2018) (Reyna, J).

In 2012, the ITC instituted a § 337 investigation based on DBN’s alleged infringement of a patent directed to satellite communications devices. During the investigation, DBN executed a consent order, and the ITC terminated the investigation. Soon after, the patent owner instigated an enforcement proceeding alleging that DBN had violated the consent order, which eventually resulted in a $6 million civil penalty against DBN.

Meanwhile, DBN filed a declaratory judgment action in district court that ultimately resulted in a finding that all of the asserted claims underlying the consent order were invalid. The patent owner appealed the invalidity determination, and DBN appealed the civil penalty assessment. In the appeal of the civil penalty, the Federal Circuit asked the ITC how it would treat an affirmance of the invalidity decision, and the ITC indicated that its rules allowed for further proceedings to reconsider the civil penalty. The Federal Circuit affirmed both the invalidity finding and the civil penalty.

On remand, DBN pursued the further proceedings and asked that the civil penalty be set aside. The ITC denied DBN’s request, explaining it was barred from doing so under res judicata principles stemming from the Federal Circuit’s affirmance of the civil penalty. DBN appealed.

The Federal Circuit reversed, finding that the reference to res judicata was a misnomer because that term refers to claim or issue preclusion, both of which require a decision in a separate case. The Court instead analyzed the question under the “law of the case” doctrine applicable to earlier decisions made within the same case. The Court found that there had been no earlier decision refusing to reassess the civil penalty in view of the affirmance of the invalidity decision. The Court noted that the ITC may have been confused in holding that the civil penalty could not be vacated in view of the invalidity decision based on the Court’s language in its earlier decision stating that “the penalty or sanction cannot be vacated by subsequent events such as invalidation.” The Court explained that it meant that rescission of civil penalty is not necessarily required by later invalidation, but that it could still be reconsidered. The Court remanded the case to the ITC with instructions so reconsider.

America Invents Act


Whose Party Is This Anyway? PTAB Panel Refuses Joinder for Follow-On Petition

In an institution decision addressing the scope of joinder under § 315(c), the Patent Trial and Appeal Board (PTAB) found that its power to grant joinder is limited to adding a party to the proceeding, and that it cannot add new issues. Proppant Express Investments, LLC v. Oren Technologies, LLC, No. IPR2018-00914 (PTAB Nov. 8, 2018) (Wetherly, APJ) (Cherry, APJ, concurring).

Proppant Express Investments (PropX) filed a first petition for inter partes review in September 2017. Six months later, the PTAB granted a partial institution on all but claim 4 of the challenged claims. After the Supreme Court of the United States’ decision in SAS Institute v. Iancu (IP Update, Vol. 21, No. 5), the PTAB modified its institution decision to institute a trial as to claim 4. On April 16, 2018, PropX filed a second petition. Because the second petition would have otherwise been time-barred, since PropX had been served with a complaint more than one year earlier, PropX filed a motion for joinder under § 315(c). The second petition added a new prior art reference, and PropX asserted that “[a]side from combination of references used to challenge claim 4, claim constructions, prior art and other evidence,” the arguments in the petition remained the same as those in the first petition.

The PTAB denied PropX’s request for joinder and denied the second petition as time barred. In the relevant part, § 315(c) states: “If the Director institutes an inter partes review, the Director, in his or her discretion, may join as a party to that inter partes review any person who properly files a petition . . . .” The PTAB found that the phrase “join as a party” limited its joinder power to joining a new party, and § 315(c) gave it no power to join new issues. The PTAB recognized that expanded panels had found differently in Target Corp. (IP Update, Vol. 18, No. 3) and Nidec Motor Corp. (IP Update, Vol. 18, No. 11), but neither decision had been designated precedential. The PTAB therefore adopted the dissent’s reasoning in Target Corp.

APJ Cherry wrote separately because he disagreed with the majority’s reasoning and articulated alternate grounds for denying joinder. He stated that he would have found that the PTAB has discretionary power to grant joinder for newly raised issues, but in this case, joinder was not warranted where the totality of circumstances showed that PropX was seeking a “second bite at the apple” and could have corrected the “mistakes” in the first petition by filing the second petition much earlier. Additionally, he stated that he would have found joinder futile because he would have denied institution of the second petition under the PTAB’s discretionary authority to deny institution using the non-exhaustive list of factors set forth in the PTAB’s precedential General Plastics decision (IP Update, Vol. 20, No. 10) for evaluating follow-on petitions. APJ Cherry stated that under such an analysis, the second petition would have been denied as a belated attempt to correct the first petition after the patent owner and the PTAB had identified weaknesses in PropX’s evidence with respect to claim 4.


Final Written Decision Estops Petitioner from Challenging Claims on Different Grounds

In an opinion addressing the scope of estoppel accruing to a petitioner following the issuance of a final written decision in an inter partes review (IPR), the Patent Trial and Appeal Board (PTAB) concluded that such a petitioner is estopped from pursuing a second IPR directed to the previously challenged claims, regardless of the grounds presented. Kingston Tech. Co., Inc. v. SPEX Techs., Inc., Case No. IPR2018-01002 (PTAB, Nov. 6, 2018) (Fishman, APJ).

Kingston petitioned for IPR of the patent at issue, asserting in its petition only the grounds instituted in a currently pending IPR, and concurrently filing a motion seeking joinder to the IPR currently pending. SPEX filed an opposition to Kingston’s motion. Kingston had previously filed a petition based on different grounds that resulted in the issuance of a final written decision finding one claim unpatentable but other claims not unpatentable. The PTAB issued an order for the parties to brief whether Kingston was estopped from requesting or maintaining the new petition under 35 USC § 315(e)(1), which estops a petitioner when the grounds were “raised or reasonably could have been raised.”

Before the PTAB, Kingston argued that estoppel did not apply here because the different grounds presented could not have been raised for the first time after institution of the prior IPR, and that these were the only grounds estopped under Federal Circuit law. The PTAB disagreed, noting that the cited case law concerned grounds that were not instituted, rather than the estoppel accruing to the petitioner in an instituted IPR that results in a final written decision. Moreover, PTAB rules prevent any new grounds following the filing of the petition; hence, Kingston’s interpretation of the statute rendered the clause “reasonably could have been raised” superfluous. Kingston further argued that the PTAB’s interpretation would encourage challenges based on all known art, but the PTAB rejected such arguments based on the plain language of the statute. The PTAB accordingly dismissed Kingston’s petition.

Lanham Act


Second Circuit Joins Majority in Applying Octane Fitness to Lanham Act

Sarah Bro

In a fight involving sales of mattresses and alleged trash talking pertaining to those mattresses, the US Court of Appeals for the Second Circuit joined the Third, Fourth, Fifth, Sixth, Ninth and Federal Circuits in holding that the Supreme Court of the United States’ decision in Octane Fitness—the case setting the standard for determining whether an award of attorneys’ fees under the Patent Act is permissible (IP Update, Vol. 18, No. 8)—also applies to the Lanham Act. Sleepy’s LLC v. Select Comfort Wholesale Corp., et. al., Case Nos. 15-3560; 16-3595 (2d Cir. Nov. 27, 2018) (Sack, J).

Sleepy’s, a mattress retailer, entered into a retail partnership with mattress manufacturer and retailer Select Comfort, to sell Select Comfort’s “Personal Preference” line of “Sleep Number” beds. During the arrangement, Select Comfort retained an exclusive right to sell its “core” line of the Sleep Number beds. Not long into the relationship, Sleepy’s became dissatisfied with its poor sales of the Personal Preference line, and started to suspect that the poor performance was due to Select Comfort’s disparagement of Sleepy’s stores and the Personal Preference mattress line sold by Sleepy’s.

Sleepy’s suspicions were confirmed through secret shopping efforts during which Select Comfort salespeople made statements to Sleepy’s secret shoppers stating that the Personal Preference line was inferior to Select Comfort’s core line in certain respects and was not protected by warranty. Sleepy’s then brought a lawsuit against Select Comfort alleging:

  • Breach of contract
  • Breach of good faith and fair dealing
  • Unfair competition
  • Slander per se
  • Fraudulent inducement
  • Violation of the Lanham Act due to false and misleading descriptions of Sleepy’s products

The district court decided in favor of Select Comfort and granted an award of attorneys’ fees to Select Comfort under the “exceptional case” provision of the Lanham Act, finding “overtones” indicating that plaintiff’s case was filed as a “competitive ploy.” Sleepy’s appealed.

On appeal, Sleepy’s argued that the district court improperly dismissed each of its claims and that attorneys’ fees should not have been granted. Out of the six theories of liability alleged, the Second Circuit found that the district court erred only in dismissing the slander cause of action and remanded the slander claims for the district court to determine whether Sleepy’s consented to the allegedly defamatory statements. The Court also vacated the fee award judgment on grounds that the Octane Fitness standard should have been applied in determining whether the fees were, in fact, warranted. The Court noted that, on remand, the district court must also provide adequate justification for its apportionment of the fees.

With respect to the slander claims, the Second Circuit agreed with Sleepy’s that the district court erroneously determined that the publication element of the slander cause of action could not be satisfied under New York law if the defamatory statement was made only to the defamed company’s representatives. Instead, the Court concluded that Select Comfort’s statements could meet the publication element despite the fact that they were made to Sleepy’s representatives. However, the Court instructed that the district court should consider on remand whether Sleepy’s consented to the defamatory statements by eliciting them largely for the purpose of enabling the lawsuit.

Finally, the Second Circuit concluded that the district court erred in its fee determination, both as to whether the fees were warranted as an “exceptional” Lanham Act case and as to the amount. While the district court relied on older Second Circuit cases in granting the fee award, the 2014 decision by the Supreme Court in Octane Fitness ruled that an “exceptional case” under the Patent Act’s attorneys’ fees provision is one that stands out from others with respect to the substantive strength of a party’s litigating position or the unreasonable manner in which the case was litigated. Joining the majority of the circuits, the Court held that Octane Fitness also applies to the Lanham’s Act identically worded attorneys’ fees provision, and thus remanded the issue to the district court for a new determination under the Octane Fitness standard. The Court noted that if the district court again decided that the case was “exceptional” under the Lanham Act and thus warranted attorneys’ fees, it must properly apportion the fees specific to only the Lanham Act claims. In particular, the Second Circuit noted that the district court’s initial decision failed to provide a rationale for its prior apportionment to enable a reviewing court to determine whether the apportionment properly aligned with the Lanham Act claims alleged.

In sum, the Second Circuit affirmed the majority of the district court’s rulings, but nevertheless vacated and remanded the issues of slander per se and the award of attorneys’ fees under the Lanham Act.

Right of Publicity


No Penalty: Fantasy Football Does Not Violate Players’ Right of Publicity

The US Court of Appeals for the Seventh Circuit affirmed a district court’s dismissal of a right of publicity complaint, finding that the fantasy sports operators’ use of player information fell within the “newsworthy value” exception. Daniels v. FanDuel, Inc., Case No. 17-3051. (7th Cir., Nov. 29, 2018) (Easterbrook, J).

Three former college football players sued fantasy football organizations FanDuel and DraftKings claiming that the use of their names, images and statistics on FanDuel and DraftKings’ websites violated their right of publicity under Indiana law. The fantasy football organizations argued that their use was protected under two Indiana right of publicity law exceptions: the newsworthy value exception and the public interest exception. The district court agreed and dismissed the claims. The former college football players appealed.

The Seventh Circuit certified a question to the Indiana Supreme Court, asking whether, under Indiana law, fantasy sports organizations that receive payment to play and then pay cash prizes to customers must obtain the consent of sports players whose names, pictures and statistics they use. The Indiana Supreme Court responded that the use of college athletes’ names, pictures and statistics by fantasy sports operators does not violate Indiana right of publicity law because the use falls under the newsworthy value exception since these players’ names, images and statistics are published in newspapers and websites nationwide, and it would not be sound law to prevent fantasy sports operators from using such publicly available information. The Indiana Supreme Court noted, however, that any implication that a player is commercially endorsing the fantasy games would not fit under an exception. While the Indiana Supreme Court did not decide whether there was commercial endorsement in this case, it stated that it was unlikely, given that fantasy sports include all players, which generally does not create an impression that one particular player is endorsing the organization. The Indiana Supreme Court did not decide whether use of an athlete’s name, likeness and statistics falls into the public interest exception.

The Seventh Circuit affirmed the district court finding, basing its decision predominately on the Indiana Supreme Court’s answer that fantasy sports operators’ use of player information falls within the newsworthy value exception. The Court noted that the Indiana Supreme Court did not decide whether fantasy sports amount to gambling, or whether gambling would make such organizations ineligible for these exceptions, but stated that such questions should not be decided by the district courts and that therefore there were no further issues for the federal courts to decide.



Sturgis Motorcycle Rally: A Long and Bumpy Ride

Addressing issues relating to validity of registered and common law trademarks, the US Court of Appeals for the Eighth Circuit upheld a jury verdict finding infringement of two registered marks and reversed a verdict finding infringement of three marks because the owner of the mark failed to establish that the marks had acquired secondary meaning. Sturgis Motorcycle Rally, Inc. v. Rushmore Photo & Gifts, Inc. et al., Case Nos. 17-1762, -1869, -2712, -2731 (8th Cir. Nov. 2, 2018) (Arnold, J).

In 1938, Clarence “Pappy” Hoel started a motorcycle rally in Sturgis, South Dakota, that has grown to be the largest rally in the world, with several hundred thousand attendees. In the late 1980s, Tom Monahan, a local artist and vendor, donated a composite mark for the rally (the Monahan mark) to the Sturgis Area Chamber of Commerce, which had just accepted a central role in promoting the rally.

In 2010, the Chamber assigned its rally-related marks to Sturgis Motorcycle Rally (SMRI), which runs a licensing program. Licenses for the rally-related marks cost vendors 8 percent of the wholesale price of the goods sold.

Over the years, the rally has attracted independent vendors who sell rally t-shirts, souvenirs and pins. The Niemann family owns Rushmore Photo & Gifts and sold rally souvenirs without a license, but advertised some of the goods as “officially licensed.” SMRI sued Rushmore, the Niemanns, JRE and Walmart (collectively, Rushmore) for trademark infringement and related Lanham Act violations. At trial, a jury found that Rushmore infringed SMRI’s federally registered Monahan, STURGIS and STURGIS BIKE WEEK marks and its common law STURGIS MOTORCYCLE RALLY and STURGIS RALLY & RACES marks. Rushmore appealed.

The Eighth Circuit first addressed SMRI’s argument that the district court erred in holding that Rushmore was not precluded from challenging the validity of SMRI’s trademarks under the doctrine of licensee estoppel because Rushmore Photo & Gifts had once licensed the Monahan mark for postcards. The Court noted that licensee estoppel generally applies only to marks that are licensed (here the Monahan mark), and Rushmore had not challenged the validity of that particular mark. The Court noted that even if Rushmore Photo & Gifts was held to be estopped from challenging the validity of the marks, the other defendants would have been free to challenge the validity of SMRI’s marks since they had never before licensed the mark.

The Eighth Circuit next addressed whether SMRI had established that its registered STURGIS mark had acquired secondary meaning and was protectable. While registered marks are generally entitled to a presumption of validity, the STURGIS registration was not, because it was based on § 2(f) of the Lanham Act, and Rushmore had allegedly infringed the STURGIS mark prior to its registration date. The Court found that SMRI failed to establish that it had engaged in “long and exclusive” use of the STURGIS mark in connection with the sale of its goods. The Court rejected SMRI’s attempt to show that every use of the word “Sturgis” by it and its licensees in advertisements, on goods and in other trademarks established SMRI’s exclusive use of the STURGIS mark. The Court also noted that testimony showed that many people used STURGIS on rally-related goods and services in the 1900s and 2000s, and that the rally was commonly referred to as STURGIS. The Court thus reversed the jury verdict, finding that the jury erred in finding that the STURGIS mark had acquired secondary meaning and therefore was valid and infringed. The Court further held that SMRI failed to prove that its common law marks STURGIS MOTORCYCLE RALLY and STURGIS RALLY AND RACES had acquired secondary meaning.

Rushmore also appealed the jury’s finding that it intentionally and willfully infringed the Monahan mark by selling a shot glass (shown below), and that the shot glass was a counterfeit product.

The Eighth Circuit found that the record supported a finding of willfulness based on the many similarities between the dominant portions of the Rushmore shot glass and the Monahan mark, including the circular shape, the eagle facing right, Sturgis/Black Hills followed by the words “Motor Classic” in an arc, and the feathers. The Court also noted that the shot glass stated “Genuine Article—Accept No Substitutes,” and a jury could conclude that Rushmore intended to confuse customers with that language. The Court, however, held that given the obvious differences between the shot glass and the Monahan mark, the jury did not have a sufficient basis to find that the shot glass was a counterfeit.

Finally, the Eighth Circuit reviewed whether the district court properly applied laches and acquiescence to preclude SMRI from recovering the $913,000 in damages awarded by the jury. SMRI argued that Rushmore was not entitled to equitable relief because its willful infringement was equivalent to a finding of unclean hands. The Court noted that a defendant that has engaged in willful infringement may still be entitled to equitable relief. In this case, the Court remanded the laches and acquiescence issue since, in light of its finding that the STURGIS registration and common law marks were invalid, it was no longer clear whether the district court would have applied laches to only the sales of goods infringing the Monahan and STURGIS BIKE WEEK marks.


TTAB Mi-STEAK-enly Evaluated Evidence in Determining No Likelihood of Confusion

Eleanor B. Atkins

Addressing the Trademark Trial and Appeal Board’s (TTAB’s) treatment of certain evidence in its likelihood of confusion analysis, the US Court of Appeals for the Federal Circuit vacated and remanded the TTAB’s dismissal of the opposition of a steak company using the geographic word “Omaha” against the application of a meat packer also using “Omaha” as part of its mark. Omaha Steaks Int’l, Inc. v. Greater Omaha Packing Co., Inc., Case No. 18-1152 (Fed. Cir., Nov. 15, 2018) (Prost, CJ).

Omaha Steaks sells processed meat in connection with various OMAHA STEAKS trademarks and has done so since 1959. Greater Omaha Packing (GOP) has been in business since at least as early as 1956 and sells boxed beef to wholesalers such as hotels, restaurants and even Omaha Steaks. In 2013, GOP filed a trademark application for GREATER OMAHA PROVIDING THE HIGHEST QUALITY BEEF and design, covering “meat, including boxed beef primal cuts” in International Class 29.

Omaha Steaks opposed, alleging a likelihood of confusion with its previously registered Omaha Steaks marks covering nearly identical goods.

The TTAB dismissed the opposition, finding no likelihood of confusion because:

  • Omaha Steaks failed to show that its marks were famous.
  • Third-party use of “Omaha” indicated that it functioned as a geographic indication and was therefore entitled to a narrow scope of protection.
  • The differences between the marks outweighed the similarities.

On appeal, Omaha Steaks presented three arguments:

  • The TTAB improperly disregarded Omaha Steaks’ fame evidence.
  • The TTAB incorrectly relied on evidence of third-party marks in connection with dissimilar goods.
  • The TTAB ignored the word “BEEF” when analyzing the similarity of the marks.

With respect to the fame of Omaha Steaks’ marks, the Federal Circuit agreed that the TTAB had improperly disregarded the advertising expenditure and sales figures, stating that “[the TTAB’s] fact-findings [] confirm that due to Omaha Steaks’ sales and marketing efforts, the consuming public has been regularly exposed to Omaha Steaks’ marks on a nationwide scale.” Furthermore, despite GOP’s argument to the contrary, no specific examples of the underlying advertisements were necessary where “[i]t is undisputed that the tradename ‘Omaha Steaks’ and related uses in its marks are what is being promoted, not a separate brand merely associated with its house mark.” The Court did agree, however, with the TTAB’s decision to disregard Omaha Steaks’ survey evidence, stating that the survey universe was “fatally” narrow, as it was composed only of Omaha Steaks’ customer base and not meat purchasers generally. Further, the TTAB’s refusal to take judicial notice of Omaha Steaks’ trademark lawsuits was harmless error because “the mere fact that lawsuits were filed is not reasonably probative of the fame inquiry,” and the TTAB “is not required to scour . . . the multiple pleadings referenced in those dockets to determine the substance of the litigations referenced.” Nevertheless, the Court vacated and remanded for the TTAB to conduct a proper analysis of the fame of the marks.

The Court also agreed with Omaha Steaks’ second argument on appeal, namely that the TTAB erroneously considered third-party OMAHA marks regardless of whether they covered similar goods (i.e., meat) in its analysis of the number and nature of similar marks used on similar goods, which could show that a mark is relatively weak. Accordingly, the Court vacated the TTAB’s finding with respect to evidence of third-party use and instructed the TTAB to reevaluate the more limited universe of evidence.

Finally, Omaha Steaks argued that the TTAB’s comparison of the similarity of the marks was flawed because it improperly relied on the irrelevant third-party OMAHA marks and failed to consider the opposed mark’s use of BEEF. On this issue, the Federal Circuit disagreed with Omaha Steaks, explaining that “[t]he absence of ‘BEEF’ from a single sentence in the [TTAB’s] order appears to be nothing more than a typographical error.”


Surname or Suds? SCHLAFLY Mark Has Acquired Distinctiveness

Jodi Benassi

The US Court of Appeals for the Federal Circuit affirmed a Trademark Trial and Appeal Board (TTAB) decision that the SCHLAFLY mark had acquired secondary meaning and met the requirements for registration. Bruce S. Schlafly and Phyllis Schlafly Revocable Trust, Successor-in-Interest to Phyllis Schlafly v. Saint Louis Brewery, LLC, Case No. 17-1468 (Fed. Cir. Nov. 26, 2018) (Newman, J).

St. Louis Brewery sells 60 types of craft beers through 14,000 retail locations, all with the SCHLAFLY mark on the label. The brewery sold more than 75 million units of SCHLAFLY beer from 2009 to 2014, not including restaurant sales. St. Louis Brewery spent more than $1 million in advertising SCHLAFLY beer in radio, print publications, billboards, social media and events. The brewery applied to register the SCHLAFLY word mark in standard character format for beer, stating that the mark had acquired distinctiveness as a result of substantially exclusive and continuous use with its goods for at least five years immediately prior to the application.

Two oppositions were filed. The estate for Phyllis Schlafly filed an opposition asserting that she was a known conservative icon and her surname is primarily associated with her and the traditional values she represented. Bruce Schlafly, Phyllis’ son and a doctor, argued that he had used his name in his medical practice since 1986.

The TTAB found that the SCHLAFLY mark, as used in connection with beer, had acquired distinctiveness because of the long continuous use of the mark; the geographic scope of the use; the variety of products with the mark in commerce; the prominent placement of the mark on the brewery’s products; the large sales volume of SCHLAFLY craft beer; the marketing types, expenditures and revenue of Saint Louis Brewery; and the significant ranking and awards won by SCHLAFLY beer. The TTAB found that it did not need to address whether the mark was a surname if it had acquired distinctiveness. The TTAB also found sufficient evidence that the mark had acquired distinctiveness and rejected the opposers’ argument that the brewery was required to submit a customer survey. The opposers had requested reconsideration, asserting that it was improper to register a mark based on distinctiveness without a survey of secondary meaning. The TTAB denied reconsideration, and the opposers appealed.

Section 2(f) of the Lanham Act permits registration of marks that have acquired distinctiveness. The statute provides that if there is proof of substantially exclusive and continuous use of the mark for five years immediately preceding the application, the TTAB may accept such proof as prima facie evidence that a mark has become distinctive as used on or in connection with the applicant’s goods in commerce. The Federal Circuit found that Saint Louis Brewery presented 15 different forms of evidence to the TTAB, which the TTAB evaluated before reaching its conclusion. The brewery provided evidence of the commercial success of the SCHLAFLY branded beer, as well as media coverage in local and national outlets, including the Washington Post and the Wall Street Journal. The brewery also demonstrated more than 25 years of continuous use of the SCHLAFLY mark.

The opposers, citing the Federal Circuit’s 1985 decision in In re Etablissements Darty et Fils, argued that the Court should adopt a new test, one they called a “change in significance” test, where a surname cannot be registered as a trademark without showing a change in significance to the public, i.e., from the surname to the identifying mark for specified goods. The Court disagreed, finding Darty to be distinguishable from the facts in this case. The issue in that case was whether Darty was primarily merely a surname, whereas here, the TTAB found that SCHLAFLY had acquired secondary meaning for use in connection with beer products.

The opposers further argued that § 1052(e) of the Lanham Act prohibited the registration of marks that are primarily merely a surname. The Federal Circuit pointed out that the TTAB correctly stated that the trademark statute provides that words that are primarily merely a surname can be registered as trademarks if they have acquired secondary meaning in trademark use. Because the TTAB found that the SCHLAFLY mark for beers had acquired secondary meaning, § 1052(e) did not bar the registration. The Court thus affirmed the TTAB’s decision.




Attempts to Hide Settlement Leads to Sanctions and No Award of Attorneys’ Fees

Addressing the award of attorneys’ fees under the Copyright Act, the US Court of Appeals for the Seventh Circuit affirmed a district court’s finding that a defendant was not the “prevailing party” for purposes of a fee award determination because the settlement resulted in a dismissal with prejudice. Bell v. Vacuforce, LLC, Case Nos. 18-1159, -1368 (7th Cir. Nov. 14, 2018) (Hamilton, J).

Bell filed a copyright infringement lawsuit alleging that Vacuforce had published Bell’s photograph on its website without a license. Vacuforce hired a lawyer, Paul Overhauser, to defend against the allegations. This was not the first time Bell and Overhauser were on opposing sides: Bell filed dozens of similar copyright lawsuits in the past, and Overhauser previously defended an unrelated defendant, Lantz, in one of those cases. Ultimately, Bell and Vacuforce settled the current lawsuit, which was then dismissed with prejudice.

After Vacuforce was dismissed, Overhauser filed a motion seeking to recover attorneys’ fees under the applicable provisions of the Copyright Act. Vacuforce’s motion made no mention of the settlement and further argued that this suit was identical to the prior case against Lantz. Bell opposed the motion, explaining that the current case had been dismissed because of settlement and that the prior Lantz case was dismissed because Bell lacked sufficient factual basis to maintain the suit, and not because of a settlement. The district court denied the motion and ordered Overhauser to show cause why he should not be sanctioned under Rule 11. In response, Overhauser argued that Vacuforce was the prevailing party for purposes of the fee provision of the Copyright Act, and the settlement agreement was irrelevant because a dismissal with prejudice should count as a win for a defendant. Overhauser also argued that Rule 11 sanctions cannot be imposed for an omission of fact. The district court rejected these arguments, entering a sanction of $500 against Overhauser. Overhauser appealed.

The Seventh Circuit affirmed the district court’s finding. The Court found no US jurisprudence supporting the proposition that a settlement requiring dismissal with prejudice allows a court to treat a defendant as the prevailing party such that it is entitled to costs and attorneys’ fees. The Court also found that the district court did not abuse its discretion by imposing sanctions against Overhauser, noting that a party’s failure to disclose settlement is sanctionable conduct. The Court saw no reason why Rule 11 should be interpreted to allow lawyers to file frivolous and abusive pleadings after a judgment without the threat of court-initiated monetary sanctions.

Trade Secrets


Read the Signs: No Prevailing Party when Case Dismissed Without Prejudice

The US Court of Appeals for the Fifth Circuit found that a defendant is not eligible for an award of attorneys’ fees under the Defend Trade Secrets Act when the case is dismissed without prejudice. Dunster Live, LLC v. Lonestar Logos Mgmt. Co., Case No. 17-50873 (5th Cir. Nov. 13, 2018) (Costa, J).

Dunster and Lonestar used to be part of the same limited liability company that had a contract with the State of Texas to construct and install highway signs advertising food and lodging at approaching exits. Lonestar subsequently formed a new company without Dunster. The new company won the signage contract after the old contract expired. Dunster filed a trade secrets action, claiming that Lonestar stole proprietary software and a database in violation of the Defend Trade Secrets Act. After the district court rejected Dunster’s request for a preliminary injunction, Dunster requested permission to dismiss the case without prejudice, which the district court allowed. After the dismissal, Lonestar filed a motion seeking attorneys’ fees. The district court denied the motion, finding that a dismissal without prejudice does not make a defendant a prevailing party, since the plaintiff is free to resurrect its claims at a later date. Lonestar appealed.

The Fifth Circuit affirmed the district court’s ruling. The Court rejected Lonestar’s argument that the district court’s rule could allow a plaintiff to evade paying fees to prevailing defendants by strategically seeking dismissal without prejudice, which requires court approval. The Court also noted that Rule 11 provides a check on parties litigating in bad faith. Finally, the Court found that the language of the Defend Trade Secrets Act attorneys’ fee provision limits fee awards, and allowing a defendant to obtain fees based on a plaintiff’s bad faith would read the words “prevailing party” out of the statute.


Ex Parte Proceedings Without Defendant Involvement Violate German Constitutional Law

Hon.-Prof. Dr. Henrik Holzapfel

In two recent decisions, the German Federal Constitutional Court declared preliminary injunctions (PIs) unconstitutional if they are granted without hearing or advance notice to the defendant. Case Nos. 1 BvR 1783/17, 1 BvR 2421/17 (Sept. 30, 2018).

Because of the particular urgency of injunctive relief or counterstatement claims against allegedly false statements in the media, German courts historically have often granted ex parte PIs. However, many courts will now need to adopt new procedures in order to avoid violating a defendant’s constitutional right to be heard and to have procedural equality. These two Federal Constitutional Court decisions also will likely have an impact on the broader enforcement of intellectual property rights, such as patent rights.

The first of the two cases (1 BvR 2421/17) resulted from a constitutional complaint filed by a large German publishing house against an ex parte PI granted by the Hamburg Appeal Court (Oberlandesgericht). In a May 2017 printed publication, a publisher reported on a TV moderator’s tax-saving strategies. The moderator subsequently requested that the publisher release a counterstatement. After the publisher rejected this request, the moderator asserted a counterstatement claim before the Hamburg District Court (Landgericht). After three rejections of his claim by that court, additional correspondence and a telephone call occurred between a judge and the lawyers representing the moderator. As a consequence, on October 5, 2017, the Hamburg Appeal Court issued a PI ordering that the publisher release a counterstatement. Prior to the issuance of this PI order, the publisher had not been informed about any of the procedural steps that led to the PI grant, which transpired over a four-month period. In response to the order, the publisher filed a constitutional complaint.

In the second case (1 BvR 1783/17), a German editorial research network faced a similar situation. On June 7, 2017, the network published an article on its website addressing minutes from a supervisory board meeting on corruption allegations against a company. The company applied for an ex parte PI before the Cologne District Court, seeking an order that the network cease publishing the minutes. No prior warning notice was sent to the network, and the Cologne District Court granted the PI without hearing from the network. After the network filed an unsuccessful appeal against the PI grant, it proceeded to file a constitutional complaint.

The Federal Constitutional Court ruled in favor of both of these complainants—in favor of the media, under the facts of these cases. However, the lesson to be taken from these cases is more far reaching: the principle of “equality of arms,” based on Articles 3(1), 20(3) of the German Constitution, requires that a court accord each party to a trial an equal opportunity to be heard prior to any court decision. In PI proceedings, courts also must grant the defendant the right to be heard before issuing any decision against it, even in cases of extreme urgency.

While German courts remain empowered to not conduct oral hearings in cases of extreme urgency, they are not entitled to generally exclude the defendant from the proceedings prior to the issuance of a decision. As an alternative to conducting a hearing, a court can consider arguments provided by the defendant in pre-litigation communication with the PI applicant, for example. This requires the PI applicant to send a warning letter to the (putative) defendant before applying for an ex parte PI, and to give the putative defendant reasonable time to respond. Any such response must then be disclosed to the court. If the PI applicant has not sent any warning letter or otherwise allowed the defendant to respond to the relevant allegations, an oral hearing must take place.

A further aspect of these Federal Constitutional Court decisions is that German courts must now provide to the defendant whatever communication they have with or from a PI applicant. This includes meaningful minutes of telephone calls. The concept of equality of arms requires that both parties have the same level of information regarding any court proceedings.

Practice Note: These Federal Constitutional Court decisions should alter the way German courts deal with PI applications, not only in media cases but also in IP matters. In general, the following should be considered when contemplating initiation of ex parte PI proceedings: before filing an application for an ex parte PI, a warning letter or letter of entitlement should be sent to the alleged infringer. Any response from the infringer should be provided to the court, or if the infringer did not respond within a reasonably set time for response, the particulars should be explained to the court. On the other hand, when receiving a warning letter or entitlement request, the recipient may and should respond to it, providing written defense arguments and expressly requesting that these arguments be provided to any court before which legal proceedings might be initiated. The recipient of a warning letter also may consider filing, on an electronic register, a protective writ. A protective writ is a safeguard against a later-filed application for an ex parte PI. As such, it should explain the relevant defenses and expressly request that the court share any communication it has with the applicant in the event the expected PI proceeding is initiated.