TSA Headaches: Luggage Lock Licensor May Be Liable for Divided Infringement
Reaffirming the breadth of the Akamai standard for divided infringement, the US Court of Appeals for the Federal Circuit vacated a summary judgment of non-infringement where two steps of a four-step method for luggage screening were performed by the Transportation Security Administration (TSA) rather than by the defendant. Travel Sentry, Inc. v. Tropp, Case Nos. 16-2386; -2387; -2714; 17-1025 (Fed. Cir., Dec. 19, 2017) (O’Malley, J).
Tropp sued Travel Sentry for patent infringement. Tropp owns patents generally directed to a method for luggage screening that generally includes the following steps:
- Making available to consumers a special lock having a combination lock portion, a master key portion and an associated identification structure
- Marketing the special lock to consumers in a particular manner
- Using the identification structure to signal to a luggage screener to use a master key to open the lock pursuant to an agreement with the luggage screening entity
- The luggage screening entity acting pursuant to a prior agreement to look for the identification structure and, if it is found, to use the master key to open the lock as necessary
Travel Sentry licenses lock systems for airline luggage. Pursuant to a memorandum of understanding between Travel Sentry and TSA, Travel Sentry provides master keys and relevant training materials to TSA, and TSA distributes the keys to baggage-screening areas. TSA screeners identify Travel Sentry bags and use the master keys to open and reclose the bags’ locks. Based on these uncontested facts, the district court granted summary judgment in favor of Travel Sentry on the theory that Travel Sentry did not direct or control any TSA activities. Tropp appealed.
On appeal, the Federal Circuit vacated the summary judgment. Under Akamai, acts may be attributed to an alleged infringer when that infringer (1) conditions participation in an activity or receipt of a benefit upon performance of a step or steps of a patented method, and (2) establishes the manner or timing of that performance (IP Update, Vol. 15, No. 9). The Court held that a reasonable jury could find both prongs of the Akamai test to be satisfied.
Under the first prong, the Federal Circuit defined the “activity” in which TSA sought to participate as “screening luggage that TSA knows can be opened with the passkeys provided by Travel Sentry.” Further, the Court defined “benefits” to include “the ability to open identifiable luggage using a master key, which would obviate the need to break open the lock.” The Court also found the “conditioning” requirement met because TSA must perform the final two claim steps (i.e., identifying Travel Sentry locks and using the master keys to screen the bags as necessary) in order to gain the identified benefits.
Under the second prong, the Court found that a reasonable jury could find that Travel Sentry established the manner or timing of TSA’s performance. The Court relied on Travel Sentry’s entering into the memorandum of understanding with TSA (which set forth steps TSA would need to follow in order to obtain the associated benefits), providing TSA with master keys and instructional materials, establishing and its own identifying mark, maintaining and licensing the trademark to the identifying mark, and controlling the design of the locks and passkeys. The Court therefore vacated the district court’s summary judgment and remanded for further proceedings.
Practice Note: Going forward, fewer divided infringement cases should be amenable to summary judgment, because the Federal Circuit has characterized both prongs of the Akamai test as questions of fact.
PATENTS / OBVIOUSNESS VERSUS ANTICIPATION
That Which Does Not Anticipate May Still Render Obvious
Amy Mahan, PhD
Addressing the appropriate test for determining obviousness, the US Court of Appeals for the Federal Circuit reversed the Patent Trial and Appeal Board’s (PTAB’s) obviousness decision, finding that the PTAB erred by conflating its anticipation and obviousness analyses. CRFD Research, Inc. v. Matal, Case Nos. 16-2198; -2298; -2437 (Fed. Cir., Dec. 5, 2017) (O’Malley, J).
CRFD owns a patent directed to a system that allows a user to start a software session on one communication device, then transfer the session to another device. The patent’s claims require that transmission of the session history occur after the session on the first device has been discontinued, among other limitations.
Dish Network, Hulu, Netflix and Spotify filed petitions for inter partes review challenging several claims in CRFD’s patent. The PTAB instituted a review based on four grounds of unpatentability:
- Anticipated by the Bates patent
- Obvious over Bates and the Chan article
- Obvious over Bates and the Zou dissertation
- Obvious over Bates, Zou and Chan
The PTAB did not institute review on the ground that CRFD’s patent was obvious on Bates alone, finding that institution on that ground would be redundant. Ultimately, the PTAB concluded that the challenged claims were not anticipated or obvious on any of the instituted grounds, finding that Bates does not inherently disclose transmitting a session history from a first device after the session, but instead discloses transmission of session history during the session. CRFD appealed.
The Federal Circuit affirmed the PTAB’s anticipation finding but reversed the obviousness finding because the PTAB failed to conduct a separate obviousness analysis. The Court found that the PTAB’s obviousness analysis relied solely on its anticipation finding—i.e., that Bates did not disclose transmission of session history after the session is discontinued on the first device—and that the PTAB erred by not conducting a separate analysis to determine whether Bates suggests transmission of session history after discontinuation. The Court found the PTAB’s obviousness analysis improper because the tests for anticipation and obviousness are different, and the PTAB’s anticipation analysis was insufficient to decide the obviousness inquiry.
The Federal Circuit also found that the PTAB erred in not instituting the obviousness ground of Bates alone for redundancy reasons. The Court noted that barring Hulu from pressing an argument it raised in a ground that the PTAB found redundant would not only unfairly prejudice Hulu, but would also raise questions about the propriety of the PTAB’s redundancy decision.
Turning to the obviousness analysis, the Federal Circuit found that the asserted claims were obvious over Bates alone. While the system described in Bates did not disclose the transmission of session history after discontinuation of the first session, the Court found that both parties agreed that a skilled artisan would have understood that Bates’ system could transmit browser information prior to or after discontinuation of a session. The Court found that even in light of the parties’ admissions and supporting expert testimony, the PTAB failed to consider whether Bates suggested transmitting a session history after discontinuation. Having considered that evidence, the Court determined that the asserted claims were obvious over Bates.
To Be Anticipatory, Reference Must Disclose All Claim Elements Arranged as in Claim
The US Court of Appeals for the Federal Circuit affirmed a decision that a patent challenger at the Patent Trial and Appeal Board (PTAB) must prove invalidity by a preponderance of evidence and must establish anticipation within the four corners of a single prior art reference. Microsoft Corporation v. Biscotti, Inc. Case Nos. 16-2080; -2082; -2083 (Fed. Cir., Dec. 29, 2017) (O’Malley, J) (Newman, J, dissenting).
Biscotti owns a patent directed to “real-time video conferencing . . . over a network, in a conference that includes video and audio of each participant.” The patented system includes “components such as video communication devices, the internet, video sources, display devices, and set-top boxes.”
After Biscotti sued Microsoft for patent infringement, Microsoft filed three inter partes review (IPR) petitions challenging the independent asserted claims based on anticipation, and dependent claims for anticipation and obviousness. Microsoft primarily relied on Kenoyer, prior art that disclosed a “multi-component videoconferencing system” that “may include a camera, microphones, speakers, and a codec possibly used in conjunction with a computer system.” In its final written decision, the PTAB found that that Microsoft failed to prove by a preponderance of evidence that Kenoyer anticipated the challenged claims or rendered those claims obvious. Microsoft appealed.
At issue at the PTAB was whether the portions of Kenoyer relied upon by Microsoft should be viewed in their “totality” or be more narrowly interpreted in the context of the disclosure. Microsoft urged a broad interpretation, while Biscotti’s expert argued that the portions relied on by Microsoft only applied to one figure discussed in Kenoyer. The PTAB concluded that several of the portions of the reference relied on by Microsoft were “unrelated to each other in [the Kenoyer] disclosure” and moreover (even though found in a single reference) amounted to “multiple, distinct teachings that the artisan might somehow combine to achieve the claimed invention.” Microsoft appealed to the Federal Circuit.
After reiterating that anticipation is a question of fact subject to substantial evidence review, the Federal Circuit analyzed whether the PTAB’s findings on anticipation were supported by substantial evidence. The Court found that the PTAB had accurately and correctly applied the proper anticipation standard.
The Federal Circuit acknowledged that the PTAB was presented with a “close question.” Nonetheless, the Court found that the PTAB’s determination and fact findings were supported by substantial evidence, both as to anticipation and obviousness. With regard to the method of use claims under appeal, the Court noted that Microsoft had presented new arguments in its appeal brief that it had not presented in the IPR petition, and declined to entertain the new arguments, holding that they had been waived and citing Redline Detection, LLC v. Star Envirotech, Inc. (IP Update, Vol. 19, No. 1) and 37 CFR § 42.104(b)(5)).
Judge Newman dissented, arguing that two of the challenged claims “recite no new components or functions or technology” but “directly read on” Kenoyer. As viewed by Newman, Biscotti’s claims were anticipated, as they recite “the same components, having the same function, combined in the same way for the same purpose” as those found in Kenoyer.
Practice Note: Even if a challenger’s primary invalidity position is based on anticipation, it may be advisable to also present a position based on obviousness.
PATENTS / OBVIOUSNESS / OBJECTIVE INDICIA
No Amount of Prior Art Obviates Inquiry of Secondary Considerations of Non-Obviousness
Brian A. Jones
In a short opinion, the US Court of Appeals for the Federal Circuit affirmed an obviousness conclusion, explaining that a court must consider secondary indicia of non-obviousness even in the face of voluminous prior art teaching the claimed features. American Innotek, Inc. v. United States, Case No. 17-1178 (Fed. Cir., Dec. 19, 2017) (Taranto, J) (non-precedential).
American Innotek asserted that the United States infringed a patent related to “fluid containment bags” when it procured allegedly infringing bags from one of American Innotek’s competing suppliers. After making factual findings related to the scope and content of the prior art, the differences between the prior art and the asserted patent, motivation to combine and objective indicia of non-obviousness, the trial court determined that the asserted patent was invalid as obvious. American Innotek appealed.
The Federal Circuit affirmed, but clarified that the trial court was wrong to imply a categorical rule that objective indicia could never overcome a strong showing of obviousness in situations where multiple combinations of prior art were applied according to their expected functions. The Federal Circuit reiterated that secondary considerations are case-specific and such an assessment requires that “[o]bjective indicia of nonobviousness must be considered in every case where present.”
No State Law Remedies for Failure to Comply with BPCIA Notice
On remand from the Supreme Court of the United States, the US Court of Appeals for the Federal Circuit held that under the Biologics Price Competition and Innovation Act of 2009 (BPCIA), state law claims and remedies are not available in biosimilar patent litigation. Amgen Inc. v. Sandoz Inc., Case No. 15-1499 (Fed. Cir., Dec. 14, 2017) (Lourie, J).
This appeal relates to certain BPCIA provisions that establish processes for obtaining US Food and Drug Administration (FDA) approval of biosimilars and for resolving patent disputes between manufacturers of licensed biologics and manufacturers of biosimilars. At issue is Amgen’s filgrastim product, marketed under the name Neupogen®, and Sandoz’s biosimilar product, for which Neupogen was the reference product. After receiving notification from the FDA that it had accepted Sandoz’s application for review, Sandoz notified Amgen of its biosimilar application filing referencing Neupogen and its intent to launch its biosimilar product immediately upon FDA approval. Sandoz opted not to provide Amgen with its biosimilar application under the BPCIA notification provisions. Amgen sued Sandoz under 42 USC § 262(l)(9)(C) to require such disclosure, asserting violation of the BPCIA as well as claims of unfair competition, conversion and patent infringement. Sandoz counterclaimed for a declaratory judgment that its actions were permitted under the BPCIA and asserted in its answer as an affirmative defense that Amgen’s state law claims were preempted by the BPCIA.
Ultimately, the dispute reached the Supreme Court, where the issues before the Court were (1) whether 42 USC § 262(l)(2)(A)’s requirement that an applicant provide the sponsor with its application and manufacturing information is enforceable by an injunction either under federal or state law, and (2) whether under § 262(l)(2)(A) a biosimilar applicant may provide notice of commercial marketing to the manufacturer before or after obtaining a license from the FDA (IP Update, Vol. 20, No. 6). The Supreme Court held that § 262(l)(2)(A)’s requirement that an applicant provide the sponsor with its application and manufacturing information is not enforceable by federal law, and remanded the issue of whether California law would treat non-compliance with this regulation as “unlawful.” The Supreme Court also held that a biosimilar applicant may provide notice of commercial marketing to the manufacturer before or after obtaining a license from the FDA.
On remand, the Federal Circuit was tasked to consider whether California law would treat non-compliance with § 262(l)(2)(A) as “unlawful,” and if so, whether the BPCIA preempts any additional remedy available under state law for an applicant’s failure to comply with § 262(l)(2)(A), as well as whether Sandoz had forfeited any preemption defense. Starting with the issue of preemption, the Court acknowledged that neither the district court nor the Federal Circuit in its prior decision had addressed preemption on the merits. Although there is a general rule that a federal appellate court does not consider an issue not considered below, appellate courts have discretion to decide when to deviate from this rule. The Federal Circuit deviation was warranted in this case because the issue of preemption is a significant factor in interpreting BPCIA. Further, the Court found that the issue of preemption was fully briefed, and the Supreme Court expressly invited the Federal Circuit to address the issue on remand.
The Federal Circuit analyzed whether BPCIA preempts state law claims predicated on a failure to comply with § 262(l)(2)(A). First, the Court found that BPCIA is a complex, comprehensive scheme that provides a full set of standards governing the exchange of information in biosimilar patent litigation, including penalties for non-compliance. The Court viewed the comprehensive nature of BPCIA as strong evidence that Congress did not intend to authorize other remedies that were not expressly incorporated, such as state law remedies. Second, because Amgen sought to impose penalties on Sandoz through state law claims not available under BPCIA, the Court found a conflict between the methods of enforcement provided by BPCIA and by state law, and affirmed the dismissal of Amgen’s unfair competition and conversion claims, concluding that the state law claims were preempted on both field and conflict grounds.
PATENTS / IPR / CLAIM CONSTRUCTION
Got the Message: PTAB Doesn’t Have to Construe Claim Term
The US Court of Appeals for the Federal Circuit affirmed a Patent Trial and Appeal Board (PTAB) decision, finding that the PTAB did not need to explicitly construe a claim term. HTC Corp. v. Cellular Communications Equipment, LLC, Case No. 16-1880 (Fed. Cir., Dec. 18, 2017) (Reyna, J).
Cellular Communications owns a patent directed to a communications system where the mobile device is assigned a plurality of codes for transmitting messages. When transmission conditions deteriorate, such as when there is a high amount of interference, the base station may command the mobile device to increase transmit power in order to send the message. To avoid operating at maximum transmission power, the patent’s claimed solution sets a “transmit power difference” for the plurality of codes in the mobile device at the start of a message transmission. Setting this transmit power difference allows the mobile device to increase transmit power to overcome interference and avoid aborting the message transmission.
HTC and ZTE filed inter partes review (IPR) petitions challenging several claims in Cellular Communications’ patent. The PTAB instituted IPR on three grounds:
- Anticipation by Baker
- Obviousness over Reed in view of Baker
- Obviousness over Reed in view of Love
Ultimately, the PTAB issued a final written decision concluding that HTC failed to show that any of the challenged claims were unpatentable. HTC appealed.
On appeal, HTC argued that the PTAB failed to construe the term “message” according to its broadest reasonable construction. Specifically, HTC argued that the PTAB’s application of the term improperly excluded single frame EDCH messages, which were an embodiment disclosed in the specification of the challenged patent. The Federal Circuit rejected HTC’s argument and found that while neither the parties nor the PTAB explicitly construed the term “message,” the PTAB agreed in its analysis that a message transmission can occur over a single frame or over multiple frames, and thus properly understood “message” to encompass EDCH messages that last a single frame.
HTC also argued that the PTAB’s anticipation and obviousness findings were not supported by substantial evidence. However, the Federal Circuit rejected HTC’s argument, finding that the PTAB’s decision was supported by substantial evidence from the prior art references, expert declarations and admissions from HTC’s witnesses. The Court thus affirmed the PTAB’s finding of patentability.
PATENTS / CLAIM SCOPE DISPUTES
Discord as to When District Courts Must Resolve Claim Scope Disputes
In July 2017, the US Court of Appeals for the Federal Circuit issued a non-precedential decision reversing the district court for failing to provide constructions for the claim terms “replacement telephone number,” “modify caller identification data” and “outbound call.” NobelBiz, Inc. v. Global Connect, L.L.C., Case No. 701 Fed. Appx. 994 (Fed. Cir., July 19, 2017) (Hughes, J) (Newman, J, dissenting). The majority chastised the district court for giving these terms their plain and ordinary meaning (and in doing so allowing the parties’ experts to make arguments to the jury about the meaning of the claims). Judge Newman penned a powerful dissent pointing out precedent instructing that where a term is used in common parlance and does not have special meaning in the art, assigning a claim construction of plain and ordinary meaning is appropriate. This dissent led to an en banc poll as to whether the decision should be examined en banc.
The patent holder filed a petition for rehearing en banc asking the Federal Circuit to re-examine its apparent inconsistency in applying O2 Micro International Ltd. v. Beyond Innovation Technology Co. (IP Update, Vol. 11, No. 4). The petition was summarily denied, but three members of the Court voted to grant the request to take the case en banc. NobelBiz, Inc. v. Global Connect, L.L.C., Case No. 16-1104 (Fed. Cir., Dec. 8, 2017) (per curiam) (O’Malley J, dissenting, joined by Newman, J, and Reyna, J).
Judges O’Malley and Reyna agreed with the reasoning in Judge Newman’s earlier dissent that a new trial was unnecessary because the “corrected” definitions for the disputed claim terms (as provided by the Federal Circuit majority at the panel level) did not change the result on the issue of infringement and encroached on the district court’s role to submit factual questions to a jury.
The three-judge dissent went farther than Judge Newman’s original discussion, however. The en banc dissent urged the full court to address the “growing confusion” regarding when lower courts must construe claim terms. Judge O’Malley specifically criticized decisions following O2 Micro as stretching that holding “well beyond the factual circumstances at issue there.” In O2 Micro, the parties brought the district court a legitimate dispute as to the scope of claim language that was not readily understandable and would be understood only by one of ordinary skill in the art. In this case, however, the parties did not dispute how one of skill in the art would understand the scope of the claims; the parties instead disputed whether the district court was required to adopt a formal claim construction beyond assigning the plain and ordinary meaning. According to the dissent, the full Federal Circuit should weigh in on what constitutes an “actual dispute” as to the scope of claims following O2 Micro.
The dissent reasoned that additional guidance would be appropriate to assist district courts in discerning the difference between legal disputes that need to be resolved prior to the jury deciding infringement, and factual disputes that are no more than non-infringement arguments masquerading as claim construction disputes. According to the dissent, the fact that parties’ experts might proffer differing definitions of a term’s plain and ordinary meaning to a jury should not be enough to justify removing that question from the jury’s consideration. Yet, because there is contrary Federal Circuit case law purporting to apply O2 Micro over the past decade, only en banc clarification would provide meaningful guidance to a district court that assigns a claim term its plain and ordinary meaning when the parties continue to dispute what the plain and ordinary meaning is.
Practice Note: There remains some confusion in the case law as to what constitutes an “actual” claim scope dispute. Unless and until this ambiguity is clarified, litigants can expect district courts to feel pressure to resolve disputes regarding the “scope” of claim terms assigned their plain and ordinary meaning even if those corresponding arguments do not become ripe until the exchange of expert reports, or even if they are not raised until the eve of trial (or in the midst of trial following objectionable expert testimony).
PATENTS / INEQUITABLE CONDUCT / ADVERSE INFERENCE / DECEPTIVE INTENT
No Rehearing on Inequitable Conduct
Over a vigorous dissent, the US Court of Appeals for the Federal Circuit issued a per curiam order denying a petition for panel rehearing and en banc rehearing of its earlier inequitable conduct decision. Regeneron Pharmaceuticals, Inc. v. Merus N.V., Case No. 16-1346 (Fed. Cir., Dec. 26, 2017) (per curiam) (Newman, J, dissenting, joined by Reyna, J).
The original panel majority decision affirmed the lower court’s finding of inequitable conduct based not on prosecution counsel’s proven deceptive intent, but on an adverse inference drawn as a sanction for litigation counsel’s discovery misconduct (IP Update, Vol. 20, No. 8). The dissent argued that the court’s initial opinion departed from controlling precedent and created a split in inequitable conduct jurisprudence.
Regeneron filed suit alleging that Merus infringed its patent directed to using large DNA vectors to target and modify endogenous genes and chromosomal loci in eukaryotic cells. Days before the US Patent and Trademark Office (PTO) issued a notice of allowance for the application that would mature into the asserted patent, a third party filed a submission in the parent application, disclosing three prior art references. Regeneron’s in-house patent prosecution counsel, who was prosecuting the application, knew of the references submitted in the parent application but failed to cite them to the examiner. Merus contended before the district court that Regeneron’s failure to cite those references constituted inequitable conduct. Regeneron countered that the in-house counsel did not have an obligation to disclose the references to the examiner because they were cumulative of other cited art and therefore not “but-for” material. Merus argued, however, that the withheld prior art taught the very thing that Regeneron’s counsel claimed was missing from the prior art.
The district court scheduled a bench trial on Regeneron’s inequitable conduct, bifurcating the trial to first address the materiality of the withheld references, and then later consider specific intent to deceive the PTO. Following the first part of the bench trial, the district court issued an opinion explaining why the withheld references were material. The district court never concluded the second part of the bench trial. Instead, the district court pointed to Regeneron’s discovery misconduct, sanctioning Regeneron for that misconduct by drawing an adverse inference of specific intent to deceive the PTO during the earlier prosecution of the asserted patent. Ultimately, the district court held the patent unenforceable. Regeneron appealed.
In its initial decision on the merits (Judge Newman dissenting) the Federal Circuit panel majority concluded that under the broadest reasonable construction of the claims, the district court properly found that the withheld references were material. As for specific intent to deceive the PTO, the majority accepted the district court’s sanctions, underscoring the extent and seriousness of Regeneron’s litigation misconduct, in particular its “sword/shield” discovery tactics regarding the attorney-client privilege.
Dissenting from the denial of rehearing en banc, Judge Newman argued that the district court imposed its adverse inference of the finding of intent to deceive not because of the actions of prosecution counsel before the PTO, but improperly as a sanction for later litigation misconduct in the infringement suit. Citing Therasense (IP Update, Vol. 14, No. 6), Judge Newman explained that the Court’s precedent requires that materiality and deceptive intent must both be proved, not inferred. In particular, the dissent noted the Therasense Court’s instructions that “a district court may not infer intent solely from materiality. Instead, a court must weigh the evidence of intent to deceive independent of its analysis of materiality.”
Judge Newman further looked to Aptix’s holding, cutting against the majority’s acceptance of the district court’s nunc pro tunc sanction: “neither the Supreme Court nor this court has ever declared a patent unenforceable due to litigation misbehavior. . . . [T]he remedies for litigation misconduct bar the malfeasant who committed the misconduct. The property right itself remains independent of the conduct of a litigant. Litigation misconduct, while serving as a basis to dismiss the wrongful litigant, does not infect, or even affect, the original grant of the property right.” Ultimately concluding that en banc review was required, Judge Newman warned that “[t]he court’s contrary holding, has produced an irreconcilable split in our jurisprudence, to the detriment of stability of law and practice.”
PATENTS / ATTORNEYS’ FEE AWARDS
Failure to Reassess Case Under New Law Can Cost Big Bucks and Beyond
The US Court of Appeals for the Federal Circuit affirmed a district court decision awarding the defendant almost $1 million in attorneys’ fees because the plaintiff should have recognized that its patent claims were manifestly directed to an abstract idea and invalid under Alice. Inventor Holdings, LLC v. Bed Bath & Beyond, Inc., Case No. 2016-2442 (Fed. Cir., Dec. 8, 2017) (Chen, J).
Inventor Holdings sued Bed Bath & Beyond (BBB) on a patent for a method of purchasing remote products by paying at local retailers using an order code for increased security. Although the district court had previously denied § 101 motions for unpatentable subject matter against Inventor Holdings’ patent, the district court granted BBB’s motion after the Supreme Court of the United States’ decision in Alice (IP Update, Vol. 17, No. 7). Inventor Holdings appealed, and the Federal Circuit affirmed the ineligibility ruling. Afterward, the district court found the case exceptional under 35 USC § 285 and granted BBB attorneys’ fees for post-Alice litigation because Inventor Holdings’ “claims were entirely without merit” after the Alice decision, and there was a need to deter future wasteful litigation on similarly weak arguments. Inventor Holdings appealed the attorneys’ fees.
The Federal Circuit found that the lower court had acted within the scope of its discretion. Under the two-part Alice test, the invention was patent ineligible because it was “manifestly directed to an abstract idea” of locally processing payments for remote purchases using only admittedly conventional computer technology without any additional inventive concept.
Inventor Holdings argued that Alice did not change the law and that the law on patent eligibility was evolving at that time, but the Federal Circuit explained that Alice was a significant change in the law and that patents claiming economic arrangements with conventional technology (as were in issue here) were of a class specifically brought into question by Alice. It was Inventor Holdings’ responsibility to reassess its case in view of new controlling law, and this specific patent was “clearly invalid in view of Alice.” The Court found that it was well within the district court’s exercisable discretion to grant BBB attorneys’ fees, because Inventor Holdings should have recognized the obvious issues with the patent claims post-Alice.
PATENTS / AIA / IPR / BURDEN OF PROOF / PROPOSED AMENDED CLAIMS
Challenger Bears Burden of Proof for Unpatentability of Proposed Amended Claims
In an opinion addressing the burden of proof for unpatentability for a proposed amended claim in an inter partes review (IPR), the US Court of Appeals for the Federal Circuit concluded that the challenger bears the burden of proving the unpatentability of the challenged claim, including challenges based on 35 USC § 112. Bosch Auto. Serv. Solutions, LLC v. Matal, Case No. 15-1928 (Fed. Cir., Dec. 22, 2017) (Chen, J).
Autel petitioned for IPR of a Bosch patent directed to a hand-held tool for activating tire sensors and communicating with a vehicle’s tire sensor system. During the IPR, Bosch contingently moved to amend certain claims by inserting “means for recording” and “means for selecting” limitations, in the event the Patent Trial and Appeal Board (PTAB) found the original claims unpatentable.
In its final written decision, the PTAB found all challenged claims unpatentable and denied Bosch’s contingent motion to amend. The PTAB found the proposed claims indefinite under § 112, ¶ 2, because the specification failed to disclose sufficient structure corresponding to the claimed means for recording (as required by paragraph 6 of 35 USC § 112). Bosch appealed. After Bosch appealed, Autel informed the court it would not participate in the appeal.
Regarding the contingent motion to amend, Bosch argued that the PTAB impermissibly placed the burden on Bosch to establish the patentability of the proposed claims, and the Federal Circuit agreed. The panel explained that the party challenging patent validity on indefiniteness grounds carries the burden of proof. This applies to the patentability of proposed amended claims as well—the petitioner bears the burden of proving the proposed amended claims are unpatentable by a preponderance of the evidence. This burden applies to questions of indefiniteness, as with other questions of unpatentability. Hence, the panel vacated the PTAB’s denial of Bosch’s contingent motion to amend and remanded the case to the PTAB to evaluate the patentability of the proposed amended claims in view of Aqua Products v. Matal, where the Federal Circuit explained that even when a challenger ceases to participate in an IPR, the PTAB must justify any finding of unpatentability.
PATENTS / DAMAGES / MARKING
Burden of Proof on Marking Defense Is a Shifting One
Addressing issues ranging from obviousness to damages, and resolving a split among district courts, the US Court of Appeals for the Federal Circuit found that the burden of proving a marking defense does not necessarily remain on the defendant. Rather, when an accused infringer challenges compliance with the marking requirement of § 287(a), it need only identify the unmarked products sold or licensed by the patentee that it believes are covered by the patents in suit, at which point the burden shifts to the patentee to show that the identified products do not practice the patented invention. Arctic Cat Inc. v. Bombardier Recreational, Case No. 2017-1475 (Fed. Cir., Dec.7, 2017) (Moore, J).
Arctic Cat licensed Honda to manufacture and sell products under certain patents. The license agreement explicitly stated that Honda “shall have no obligation or requirement to mark” the licensed products. Arctic Cat then sued Bombardier for infringement of two of the licensed patents, and Bombardier was found to infringe the patents at a jury trial.
Bombardier moved for judgment as a matter of law (JMOL) to limit damages, arguing that Arctic Cat failed to comply with the marking requirement because Honda had not marked allegedly patented products. The district court denied the JMOL motion, finding that Bombardier had not proven that the Honda products were covered by any of the patents in suit. Bombardier appealed the district court’s denial of JMOL on validity, marking, damages and willfulness, as well as its grant of an ongoing royalty and decision to treble damages.
As for the marking issue, the Federal Circuit agreed that the accused infringer bears the initial burden of identifying which products it believes to be unmarked patented products. The Court characterized the burden as a “low bar” and explicitly noted that the accused infringer is not obliged to provide claim charts reading the claims of the patents in suit on the licensed products. The Court then explained that the accused infringer does not bear any further burden. Once the accused infringer meets its initial burden of identifying unmarked products, “[t]he burden of proving compliance with marking is and at all times remains on the patentee.”
Thus, the patentee has the burden of proving that the identified products do not practice the patented invention. Because Arctic Cat had not been provided with a meaningful opportunity in the district court to show why Honda’s products were not covered by the patents, the Federal Circuit vacated the district court’s ruling on this issue (only) and remanded the case for further proceedings.
When Patent Royalties Are Not Capital Gains
The US Court of Appeals for the Ninth Circuit held that patent royalties were not capital gains for tax purposes when the patentee retained effective control over the corporate recipient of the patents, since the patentee could retrieve the patent rights and had therefore not transferred “all substantial rights” to the patents. Cooper v. Commissioner of Internal Revenue, Case No. 15-70863 (9th Cir., Dec. 15, 2017) (Graber, J) (Kleinfeld, J, dissenting in part).
James Cooper is an inventor of more than 75 US patents related to the transmission of audio and visual signals. His patents generated significant royalties, and Cooper sought favorable tax treatment on those royalties by transferring all formal rights in the patents to Technology Licensing Corporation (TLC).
Under 26 USC § 1235(a), if a patent holder transfers “all substantial rights” to a patent, then the resulting royalty payments qualify as capital gains. However, a patent holder that retains control over the recipient of the patents has not transferred “all substantial rights,” and the resulting royalties are taxed as ordinary income, not as capital gains.
Cooper structured ownership of TLC in a way that eliminated his formal control over the patents. Cooper owned only 24 percent of TLC. In contrast, his sister-in-law, Lois Walters, and a long-time friend, Janet Coulter, together owned 76 percent of TLC. Neither had prior experience in patent licensing or patent commercialization. Each retained full-time jobs unrelated to TLC. Cooper then transferred to TLC all rights to certain patents in exchange for royalty payments. Cooper claimed that the royalty payments qualified as capital gains. The Internal Revenue Service Commissioner and the Tax Court (after litigation) disagreed. Cooper appealed.
The Ninth Circuit found that the patent royalties did not qualify as capital gains because Cooper retained effective control over TLC and therefore had not transferred “all substantial rights” to the patents. The Court agreed that Cooper did not have formal control over TLC but explained that a “bedrock principle of tax law” is that “substance controls over form.” The real issue was whether there was an actual transfer of the patent rights.
Here, the Ninth Circuit determined there was no actual transfer. At TLC, Walters and Coulter followed Cooper’s directions and did not exercise independent judgment. Cooper made all of the decisions regarding patent licensing, infringement and transfers. Cooper therefore retained effective—albeit informal—control over TLC.
A key factor in the Court’s analysis was that Cooper retained the right to terminate the transfer at will. Cooper exercised this right for some of the transferred patents. TLC had returned certain patents to Cooper for no consideration, even though the patents had commercial value. The Court therefore affirmed the Tax Court’s determination that the patent royalties were not entitled to capital gains treatment.
PATENTS / DAMAGES / LOST PROFITS
Cert Granted to Consider Whether Lost Profit Damages May Include Overseas Activities
The Supreme Court of the United States has agreed to consider whether US patent owners can recoup some profits lost because of infringement that occurs outside of the United States. WesternGeco LLC v. ION Geophysical Corp., Case No. 16-1011 (Supr. Ct., Jan. 12, 2018) (certiorari granted).
WesternGeco petitioned the Supreme Court for reversal of a US Court of Appeals for the Federal Circuit decision reducing a damages award by $93 million—damages found by a jury to represent lost profits as a consequence of ION Geophysical’s oil exploration activities outside the United States (IP Update, Vol. 19, No. 10, and Vol. 18, No. 8).
In its decision, the Federal Circuit explained that the presumption against extraterritorial application of US law has “particular force” in patent law and bars recovery of damages for overseas infringement.
The question presented is whether a patentee that has proved a domestic act of patent infringement may recover lost profits that it would have earned outside of the United States if the infringement had not occurred.
America Invents Act
AIA / IPR / SOVEREIGN IMMUNITY
State Waived Sovereign Immunity by Asserting Challenged Patents in District Court
In a rare order by an expanded panel that included the chief, deputy chief and vice chief judges, the Patent Trial and Appeal Board (PTAB) denied the patent owner’s motions to dismiss based on sovereign immunity under the 11th Amendment in six parallel inter partes review (IPR) proceedings. Ericsson Inc. and Telefonaktiebolaget LM Ericsson v. Regents of the University of Minnesota, Case Nos. IPR2017-01186; -01197; -01200; -01213; -01214; -01219 (PTAB, Dec. 19, 2017) (Ruschke, Chief APJ) (Bisk, APJ, concurring). The PTAB explained that while the sovereign immunity defense under the 11th Amendment is generally available to a patent owner in an IPR proceeding, asserting the patent in district court litigation effectively waives sovereign immunity.
Underscoring the significance of the issue, the PTAB initially explained that the chief judge had expanded the panel under 35 USC § 6 and the PTAB’s Standard Operating Procedures. In particular, the PTAB noted that the issue of waiver of sovereign immunity had been raised before but not previously addressed by the PTAB. Citing to US Court of Appeals for the Federal Circuit authority in Vas-Cath, where 11th Amendment sovereign immunity was held to be available for interference proceedings before the Board of Patent Appeals and Interferences, the PTAB further pointed to its prior decisions, including Covidien v. University of Florida Research Foundation (IP Update, Vol. 20, No. 2), in which it previously determined that 11th Amendment immunity is available to states as a defense in IPRs.
The PTAB noted that whether a state waives its 11th Amendment immunity when it files a district court action is a matter of first impression. Analogizing the filing of an IPR to a compulsory counterclaim, the PTAB determined that the facts of the case were similar to those in the 2003 Federal Circuit decision in Regents of Univ. of New Mexico v. Knight, where the Court found that a state had waived its sovereign immunity defense as to compulsory counterclaims. After noting that when a state files a patent infringement action in federal court it triggers the one-year statutory bar for an IPR under 35 USC § 315(b), the PTAB expressed its primary concern of fundamental fairness to defendants in such a situation: “It would be unfair and inconsistent to allow a State to avail itself of the federal government’s authority by filing a patent infringement action in federal court, but then selectively invoke its sovereign immunity to ensure that a defendant is barred from requesting an inter partes review of the asserted patent from a different branch of that same federal government.”
Significantly, the PTAB observed that the patent owner itself had acknowledged as much in a motion to dismiss in a separate IPR proceeding. In that case, the patent owner had addressed a hypothetical in which a patent assertion entity assigned ownership of a patent to a state in order to invoke 11th Amendment immunity and avoid an IPR. The patent owner acknowledged that the state would have to join any infringement action, and that “[b]y voluntarily invoking federal jurisdiction in the infringement litigation, the state entity could be deemed to have waived its sovereign immunity to the IPR.” The PTAB ultimately found unpersuasive the patent owner’s argument that any waiver of sovereign immunity should be localized to the venue where the patent owner filed its infringement action.
Practice Note: The PTAB’s order was issued pre-institution and before the patent owner had submitted its preliminary response. At the time of this writing, the PTAB has issued a stay of the preliminary response because the patent owner appealed the order to the Federal Circuit and filed a motion to stay with the PTAB.
AIA / IPR / MOTION TO AMEND
PTAB Concurrence Provides Guidance on Burden of Proof for Claim Amendments
In a final written decision, the Patent Trial and Appeal Board (PTAB) allowed a patent owner to amend one of the challenged claims. In a concurring opinion, Administrative Patent Judge (APJ) Fitzpatrick explained that the petitioner should have the burden of proof that amended claims are unpatentable. Taiwan Semiconductor Mfg. Co. Ltd. v. Godo Kaisha IP Bridge 1, Case No. IPR2016-01249 (PTAB, Dec. 20, 2017) (per curiam) (Fitzpatrick, APJ, concurring).
In 2016, Taiwan Semiconductor filed a petition to institute an inter partes review (IPR) of certain claims of a Godo Kaisha semiconductor patent. After the PTAB instituted the IPR, Godo Kaisha filed a motion to amend the claims by substituting three proposed claims for three of the challenged claims.
Typically, the PTAB denies a motion to amend if it proposes (1) an unreasonable number of substitute claims, (2) claims that are broader than the challenged claims to be replaced, (3) claims that introduce new matter, or (4) claims that are not responsive to a ground of invalidity in the IPR. In addition, the PTAB will review the substitute claims to determine if they are obvious or anticipated by the prior art. Prior to October 2017, the PTAB placed the burden of proof for each of these elements on the patent owner. The patent owner was required to prove that the substitute claims were appropriate (meeting the aforementioned four requirements), and that the substitute claims were not anticipated or obvious. In October 2017, however, the US Court of Appeals for the Federal Circuit issued its decision in Aqua Products v. Matal stating that the PTAB could not require the patentee to prove that the substitute claims were not anticipated or obvious.
Here, the majority decision noted the Federal Circuit’s Aqua Products ruling and reviewed the patentability of the substitute claims, finding that one of the three claims met the patentability requirements. The per curiam decision did not address the burden of proof applied to the patentability review, however.
In a separate concurring opinion, APJ Fitzpatrick addressed the burden of proof, noting that according to the PTAB’s motion rules, the “moving party has the burden of proof to establish that it is entitled to the requested relief.” APJ Fitzpatrick reasoned that because the patent owner files a motion to amend the claims, the patent owner has the burden of production with respect to the requirements for a motion to amend—namely, (1) the substitute claims are reasonable in number, (2) the substitute claims are not broader than the original claims, (3) the substitute claims introduce no new matter, and (4) the substitute claims are responsive to a ground of unpatentability in the IPR. However, Fitzpatrick proposed that the petitioner, not the patent owner, would have the burden to raise and prove that the substitute claims are anticipated or obvious. Fitzpatrick believed that this approach would be consistent with the current IPR rules and with the Federal Circuit’s Aqua Products holding.
TRADEMARKS / SCANDALOUS AND IMMORAL MARKS / FIRST AMENDMENT
Federal Circuit Bleeps Lanham Act Ban on Immoral or Scandalous Marks
Following the Supreme Court of the United States’ 2017 decision in Matal v. Tam (i.e., the Slants case) finding the proscription on the registration of disparaging trademarks under § 2(a) of the Lanham Act to be an unconstitutional restriction on free speech (IP Update, Vol. 20, No. 6), the US Court of Appeals for the Federal Circuit took up a similar constitutionality question with respect to the bar on registration of trademarks comprised of immoral or scandalous matter under § 2(a). The Federal Circuit differed somewhat from the Supreme Court’s underlying rationale in the Slants case and concluded that the Lanham Act’s bar on registering immoral or scandalous marks is an unconstitutional restriction on free speech. The Federal Circuit therefore reversed the Trademark Trial and Appeal Board’s (TTAB’s) holding that the appellant’s application for the mark FUCT as used in connection with various apparel items was unregistrable. In re: Erik Brunetti, Case No. 15-1109 (Fed. Cir., Dec. 15, 2017) (Moore, J) (Dyk, J, concurring).
Section 2(a) of the Lanham Act provides that the US Patent and Trademark Office (PTO) may refuse to register a trademark that “[c]onsists or comprises immoral, deceptive or scandalous matter.” To issue a refusal of a trademark application under this provision of the Trademark Act, the PTO looks to whether a “substantial composite of the general public” would find the mark scandalous in the context of contemporary attitudes and in the context of the marketplace as applied to the goods or services listed in the trademark application. The PTO and subsequently the TTAB refused registration of Erik Brunetti’s trademark application for the mark FUCT, under reasoning that the general public would find the mark to be phonetically identical to the past tense of the verb “fuck,” and thus vulgar and scandalous. Brunetti appealed.
Brunetti’s arguments to the Federal Circuit were multi-pronged. He argued that substantial evidence does not support the TTAB’s finding that the FUCT mark is vulgar. Brunetti also argued that even if the mark was vulgar, § 2(a) makes no express prohibition on the registration of vulgar marks. In the alternative, Brunetti also challenged the constitutionality of § 2(a)’s bar on immoral or scandalous marks.
The Court quickly did away with Brunetti’s first set of claims, finding that substantial evidence relating to the FUCT mark, including dictionary definitions and evidence of sexual and misogynistic imagery associated with the mark and the FUCT goods, supported the TTAB’s finding that the mark was vulgar. In addition, the Federal Circuit cited prior case law holding that the PTO may prove scandalousness of a mark by establishing that the mark is vulgar.
Turning to the constitutionality question, the court distinguished its holding from the Slants case, where the Supreme Court found the § 2(a) disparagement ban to qualify as an unconstitutional viewpoint restriction. Here, the Federal Circuit concluded that the ban on immoral or scandalous trademarks impermissibly discriminates based on content in violation of the First Amendment, and does not survive strict or intermediate scrutiny.
The PTO conceded that § 2(a)’s ban on registering immoral or scandalous marks is a content-based restriction. It argued, however, that the ban survives strict scrutiny review because trademark registrations qualify as either a government subsidy program or a limited public forum, and thus do not implicate the First Amendment. In the alternative, the PTO argued that trademarks are commercial speech implicating only an intermediate level of scrutiny under Central Hudson. The Federal Circuit rejected each of these arguments.
On the issue of trademarks as government subsidies, the Court swiftly pointed out that its own en banc decision in the Slants case (IP Update, Vol. 19, No. 1) rejected that argument, and held that the government’s involvement in processing and issuing trademarks does not transform the registration scheme into a government subsidy or equivalent thereof—noting that the valuable benefits of a trademark registration are not analogous to Congress’ grant of federal funds. The Court also rejected the PTO’s claim that trademark registrations constitute a limited public forum, such that the government may restrict speech consistent with the limited purpose for which the public forum has been opened. In essence, the Court found that the PTO failed to articulate a reason why a database of registered trademarks creates a limited public forum, and warned against the dangers of implicating other databases, including DMV or marriage records, as limited public forums allowing for government speech restrictions.
Thus, the Federal Circuit determined that the PTO’s rejection of trademarks under § 2(a)’s bar on immoral or scandalous marks targets expressive messages and is therefore subject to strict scrutiny, which it cannot survive. For good measure, the Court also explained that the immoral or scandalous bar is unconstitutional even if treated as regulation of commercial speech to be reviewed under the intermediate scrutiny framework of Central Hudson. After applying the four-part test applicable to commercial speech, the Court determined that all of the government’s proffered interests in regulating speech via trademarks point to permitting burdens on speech that the government finds to be offensive. As such, the Court determined that the bar on immoral or scandalous marks under § 2(a) does not advance the government’s asserted interests in a narrowly tailored manner.
Finally, addressing the concurrence written by Judge Dyk, which advocated for a narrow interpretation of § 2(a) as banning obscene speech, which would preserve the constitutionality of the statute, the majority of the Court noted that it cannot “stand in the shoes of the legislature and rewrite the statute,” such that the words “immoral” and “scandalous” cannot be read to be limited only to trademarks of a sexual nature. Thus, while the Court lamented the potential proliferation of offensive trademarks in the marketplace, it held that the bar in § 2(a) against immoral or scandalous marks is unconstitutional because it violates the First Amendment, and reversed the TTAB’s ruling that Brunetti’s mark is unregistrable under § 2(a).
Parties Must Arbitrate Arbitrability
Addressing whether the court or the arbitrator should determine the scope of arbitrability, the US Court of Appeals for the Fourth Circuit affirmed the dismissal of a complaint for trademark infringement, finding that when two sophisticated parties expressly incorporate the JAMS Comprehensive Rules and Procedures (JAMS Rules) into their contract, the parties demonstrate a clear and unmistakable intent to delegate arbitrability issues to the arbitrator. Simply Wireless, Inc. v. T-Mobile US, Inc., Case Nos. 16-1123; -1166 (4th Cir., Dec. 13, 2017) (Wynn, J) (Floyd, J, dissenting).
Simply Wireless and T-Mobile entered into a contract that included an arbitration clause incorporating the JAMS Rules. Simply Wireless later sued T-Mobile alleging trademark infringement, trade name infringement, unfair competition, false designation of origin and passing off. T-Mobile moved to dismiss, arguing that the parties’ incorporation of the JAMS Rules into the contract evinced the parties’ intent to vest the arbitrator—not the court—with the authority to resolve the dispute of whether Simply Wireless’s claims should be arbitrated.
The district court granted the motion to dismiss on the ground that Simply Wireless’s claims fell within the scope of the parties’ contract and must be arbitrated.
The Fourth Circuit affirmed the dismissal of the complaint on alternate grounds. It explained that because the contract at issue expressly incorporated the JAMS Rules, the parties had clearly and unmistakably intended to let the arbitrator determine the arbitrability of claims arising out of the contract. It explained that the mere incorporation of a clause agreeing to arbitrate all claims “arising out of” or “relating to” the contract does not evince the parties’ clear and unmistakable intent to vest the arbitrator with authority to resolve arbitrability disputes. But express incorporation of the JAMS Rules into the contract does demonstrate such an intent.
The Court therefore held that the district court erred in deciding the arbitrability of Simply Wireless’s claims rather than referring the issue to the arbitrator. It concluded, however, that dismissal of the complaint was still the proper result, because the incorporation of the JAMS Rules into the contract vested the arbitrator with the authority to resolve all arbitrability disputes.
Practice Note: The default rule is that questions of arbitrability are for the court, not the arbitrator, to decide. Where, however, the parties demonstrate a clear and unmistakable intent to delegate arbitrability issues to the arbitrator—for example, by explicitly incorporating the JAMS Rules into the contract—the court must order the parties to arbitrate arbitrability.
COPYRIGHTS / VALIDITY / DEFECTIVE REGISTRATION
“Everyday I’m Hustlin’” to Ensure Valid Registrations
Addressing for the first time the 2008 amendment to the Copyright Act’s effect on the standard for invalidating a copyright registration, the US Court of Appeals for the 11th Circuit held that a copyright registration may only be invalidated with a showing that the registration contained material inaccuracies and that the applicant had the “required scienter of intentional purposeful concealment.” Roberts, II v. Gordy, et al., Case No. 16-12284 (11th Cir., Dec. 15, 2017) (Titus, J, sitting by designation).
Following a district court’s dismissal of appellants’ copyright infringement for lack of standing, an appeal was filed arguing that the copyright registrations were improperly invalidated under 17 USC § 411 because there was no showing of scienter for nullification of a copyright registration. Because the district court misapplied the test for invalidating copyright registrations by failing to assess scienter, the 11th Circuit reversed and remanded the district court’s dismissal of the copyright infringement claim.
This action arose from a dispute between the authors of “Hustlin’,” the classic rap song by Rick Ross (aka Mr. Roberts II), and Stefan and Skyler Gordy (collectively, the music group LMFAO). Specifically, appellants alleged that LMFAO’s use of the line “everyday I’m shufflin’” in its song “Party Rock Anthem” infringes on the lyric “everyday I’m hustlin’” from “Hustlin’.” The present appeal focuses on three separate copyright registrations by the appellants, each of which is defective in some way.
As a result, the district court sua sponte raised the issue of ownership, even though LMFAO did not include this defense in its answer nor did it ever contest ownership. The 11th Circuit initially took issue with the district court’s decision to assess the copyright registration’s validity because the assessment of whether to invalidate the defective copyright registrations was an impermissible attempt by the district court to raise an affirmative defense that was likely waived by LMFAO.
In reversing the district court’s finding that the copyright registrations were invalid, the 11th Circuit found that the district court misapplied the test for invalidity by not assessing the applicant’s intent. To support this test, the Court cited to St. Luke’s v. Sanderson, which cited to a 2008 amendment to the Copyright Act and to Original Appalachian Artworks v. Toy Lot to reaffirm that “intentional or purposeful concealment of relevant information” is required to invalidate copyright registration. The Court found the minor inconsistencies between the copyright registrations insufficient to show intent to deceive the Copyright Office. Therefore, the Court concluded that Rick Ross was “hustled” out of court on an improper basis of invalidity, and as such, he should be “shufflin’” back to have his day in district court.
Practice Note: Copyright holders should be careful when submitting copyright registrations and make sure that the forms are properly filled out and that subsequent registrations refer to prior registrations so as to avoid this potential invalidation of copyright.
Alleged infringers should include an invalidity affirmative defense in their answer, since the court seemed willing to remand the case solely on the waiver of the invalidity defense alone.
Paul St. Marie, Jr., is a law clerk in the law firm of McDermott Will & Emery LLP and is based in Washington, DC. He focuses his practice on intellectual property matters.