IP Update, Vol. 15, No. 7, July 2012

In the wake of the decision of the U.S. Supreme Court in Mayo Collaborative Services v. Prometheus Labs (see IP Update, Vol. 14, No. 6) the U.S. Court of Appeals for the Federal Circuit once again wrestled with the issue of when a patent claim is directed to a non-patent eligible “abstract idea.” In the context of a computer implemented invention, a divided panel concluded that a group of patents directed to a computerized trading platform for exchanging obligations so as to eliminate “settlement risk,” defined patent-eligible subject matter under 35 U.S.C. § 101. CLS Bank International v. Alice Corp. Pty. Ltd., Case No. 11-1301 (Fed. Cir., July 9, 2012) (Linn, J.) (Prost, J., dissenting). The dissent sharply argues that the majority not only “resists” the unanimous Supreme Court directive from Prometheus, but moreover “creates an entirely new framework” that permits district courts to avoid even addressing § 101 quicksand at will.

Section 101 Challenges as a Threshold Issue

While recognizing that the Supreme Court in Bilski (see IP Update, Vol. 13, No. 7) characterized § 101 as a “threshold test” that “certainly can be addressed” first (emphasis in original), the majority opinion opens with a discussion of the purpose and role of §§ 101, 102, 103 and 112, emphasizing the discretion available to district courts to “to control the conduct of proceedings before them, including the order of presentation of issues and evidence.”

In case the point was not clear enough (as to whether, when or if a § 101 challenge must be considered by a district court even if raised) the majority reiterated that “consistent with its role as master of its own docket, a district court properly acts within its discretion in deciding when to address the diverse statutory challenges to validity.”

Abstract Ideas

The substantive issue presented was whether the patents in suit are directed to an “abstract idea” i.e., in derogation of the Supreme Court ruling in Prometheus, and thus directed to non-patent-eligible subject mater under § 101. Recognizing that the “abstract idea” test is itself an abstraction, the majority surveyed various Supreme Court cases and, as a subset of that test, the related articulation of preemption as the effective grant of “a monopoly over an abstract idea,” as preemption being the basic evil to be avoided. In summarizing the cases, the Court noted that neither “mere field of use limitations” nor “the addition of ‘post-solution’ activity” could “transform an unpatentable principle into a patentable process.” On the other hand, as the Court explained, § 101 does not bar patent claims that are directed to “an application of a law of nature or mathematical formula to a known structure or process.” (Emphasis in original.)

Against that backdrop, the Court proceeded to analyze the “abstract idea” test as applied to computer-related inventions in terms of the “machine-or-transformation” test (recognized by the Supreme Court in Bilski as a “useful” tool, but not a dispositive test), noting along the way that the “mere implementation on a computer of an otherwise ineligible abstract idea will not render the asserted ‘invention’ patent eligible,” but that “a claim that is drawn to a specific way of doing something with a computer is likely to be patent eligible whereas a claim to nothing more than the idea of doing that thing on a computer may not.” (Emphasis in original.)

The majority concluded “that when after taking all of the claim recitations into consideration it is not manifestly evident that the claim is directed to a patent ineligible abstract idea, that claim must not be deemed for that reason to be inadequate under § 101. Unless the single most reasonable understanding is that a claim is directed to nothing more than a fundamental truth or disembodied concept, with no limitations in the claim attaching that idea to a specific application, it is inappropriate to hold the claim is directed to a patent ineligible ‘abstract idea’ under 35 U.S.C. § 101.”

With its now test in place, the majority criticized the district court for “looking past the details of the claims” and concluded that the asserted claims “require computer implementation,” i.e., an indication that they meet the “machine” prong of the machine-or-transformation test, and “appear to cover the practical application of a business concept in a specific way, which requires computer implemented steps of exchanging obligations.” On that basis, the majority reversed the district court decision to the contrary.

Judge Prost concluded that the asserted claims “are abstract ideas repackaged as methods and systems.” In her view, the majority failed to follow the prescription of the Supreme Court against patenting abstract ideas by focusing on the “computer implementation” aspect of the claims, rather than the "inventive concept" analysis on which the Supreme Court test is predicated.

Practice Note: The U.S. PTO has recently issued examination guidelines for analyzing subject matter eligibility under Prometheus (see IP Update, this issue). IP Update will monitor the situation and update further if the Federal Circuit's Alice Corp. decision results in no definition to the examination analysis guidelines.

Patents / Obviousness

“Clear and Convincing” Is the Standard for Obviousness No Matter What
by Christopher L. May and Clifford (Dale) R. Lamar II

Clarifying the standards and burdens associated with an obviousness analysis, the U.S. Court of Appeals for the Federal Circuit found that the presumption of validity and burden of proving obviousness do not change regardless of the facts of a particular case. Sciele Pharma Inc. v. Lupin Ltd., Case No. 12-1228 (Fed. Cir., July 2, 2012) (Moore, J.) (Newman, J., dissenting).

The patent in suit was obtained after a series of errors by the U.S. Patent and Trademark Office (USPTO). The examiner issued claims that had been previously rejected as obvious over a foreign patent application to Cheng. The patentee informed the examiner of the errors, but nonetheless the patent issued with the previously rejected claims.

The patent was eventually listed in the Orange Book for Fortamet, an extended-release tablet of metaformin hydrochloride. Lupin submitted an Abbreviated New Drug Application (ANDA) seeking approval for a generic version of Fortamet, and Sciele sued Lupin asserting infringement of Sciele’s patent.

After the statutory 30-month stay expired, Lupin made an “at risk” launch of its ANDA product. Sciele sought a preliminary injunction, which was initially granted by the district court. Later, the injunction was vacated and remanded by the Federal Circuit because the lower court failed to address Lupin’s obviousness arguments that the patent claims were invalid in view of Cheng and a foreign patent application to Timmins. On remand, the district court again found for Sciele, and issued a preliminary injunction. The district court concluded that KSR was inapplicable to Lupin’s obviousness argument because Cheng and Timmins were before the UPSTO during prosecution and that, given the Patent Office was “a qualified government agency,” the court must apply a heightened burden of proving obviousness, and that statements regarding enablement during prosecution could not be used as proof of obviousness.

The Federal Circuit vacated the preliminary injunction and remanded for further proceedings, finding that, because the lower court incorrectly concluded that Lupin failed to raise a substantial question of validity regarding the asserted patent claims, the court had abused its discretion by issuing the preliminary injunction. The Court found that the lower court had erred by applying a heightened standard of validity because Cheng and Timmins were before the USPTO. The Federal Circuit stated that the burden of proving invalidity is “clear and convincing evidence,” regardless of whether (or not) the references at-issue were before the Patent Office during prosecution. The Court stated that it may consider information in the prosecution history in examining whether the accused infringer has met his burden of clear and convincing evidence. The Federal Circuit also found KSR applied regardless of whether the references at-issue were before the Patent Office.

On that basis, the Federal Circuit found that Lupin had raised a substantial question of patentability. The Court found that Cheng combined with Timmins disclosed all of the claimed limitations and that a person of ordinary skill in the art would be motivated to combine the references because Timmins taught benefits over other extended-release metformin, like that in the Cheng reference. The Federal Circuit also found that an enablement argument made during prosecution that one of ordinary skill could use prior art methods and formulations to achieve the claimed pharmacokinetic limitations of the invention was held to be admissions of “predictability” and skill in the art. Therefore, the Court vacated the preliminary injunction and remanded for further proceedings.

Patents / Invalidity

A Sticky Situation—Secondary Considerations Require NEXUS to the Claimed Invention
by Avani C. Macaluso

Addressing issues of invalidity and non-infringement of patents asserted between direct competitors in the chewing gum market, the U.S. Court of Appeals for the Federal Circuit explained that in order to be entitled to rely on evidence of unexpected results commercial success or copying, the evidence of secondary translations must be tied to the claimed invention, i.e., the so-called nexus requirement. WM Wrigley Jr. Co. v. Cadbury Adams USA LLC, Case Nos. 2011-1140, 1150 (Fed. Cir., June 22, 2012) (Bryson, J.) (Newman, J. concurring-in-part and dissenting-in-part).

Wrigley and Cadbury cross-alleged patent infringement of patents directed to chewing gum that provides a cooling sensation when chewed. The Wrigley patent was directed to chewing gum containing a combination of menthol and WS-23 coolant, while the Cadbury patent was directed to a chewing gum containing a combination of menthol and WS-3 coolant.

The district court found that one claim of Wrigley’s patent was invalid as anticipated by a patent to Shahidi and another was invalid as obvious in view of a patent to Luo and a publication by Parrish. The lower court rejected Wrigley’s evidence of unexpected results, commercial success and copying. The district court also found that Cadbury’s patent was not infringed, either literally or under the doctrine of equivalents. Wrigley appealed.

The Federal Circuit affirmed the lower court’s finding of obviousness as to Wrigley’s patent, concluding that Wrigley failed to demonstrate that the combination of menthol and WS-23, as claimed, resulted in an unexpected benefit beyond what was already known in the art. The Court stated that prior art teaches that the combination of menthol and WS-3 yields “enhanced breath freshening effects” and that it was known that WS-3 and WS-23 share similar characteristics. The Federal Circuit dismissed Wrigley’s evidence of unexpected results because there was no clear showing that the claimed invention resulted in the alleged unexpected benefits that were attributable to the claimed components and not to other factors, including sweetener levels, higher gum base and filler levels and more expensive ingredients. Likewise, the Court dismissed Wrigley’s evidence of commercial success and copying for a lack of a nexus to the claimed invention.

The Federal Circuit also affirmed the lower court’s finding of anticipation based on Shahidi. The Federal Circuit found that Shahidi disclosed a number of different combinations of cooling and flavoring agents, one of which was the claimed combination of menthol, which Shahidi identified as one of the most suitable flavoring agents, and WS-23, which Shahidi listed among a group of other flavoring agents.

Regarding Cadbury’s patent, the Federal Circuit found that Cadbury could not prove infringement under the doctrine of equivalents because it had chosen to limit its claimed chewing gum composition to a certain species and not to the broader genus, despite knowing at the time of filing its application that WS-23 and WS-3 were interchangeable. Cadbury’s decision to narrowly recite claim N-substituted-p-menthane carboxamides, which excludes WS-23, was detrimental to its infringement case.

In her dissent, Judge Newman pointed out that Shahidi, the purportedly anticipatory reference, “does not show the claimed combination at all, but merely presents the ingredients on lists” which can be combined in more than a million possible combinations. Judge Newman also disagreed with the majority’s finding on obviousness, stating the record was “rife” with evidence demonstrating a nexus between Wrigley’s success of chewing gum combinations with menthol and WS-23, including Cadbury’s own internal records and marketing materials stressing the cooling effect of its reformulated chewing gum.

Patents / Obviousness

Prior Art's Disclosure of a Preferred Embodiment Does Not “Teach Away” from Inferior Alternatives
by Vinu Raj

In affirming a finding of obviousness by the U.S. Patent and Trademark Office, Board of Patent Appeals and Interferences (the Board), the U.S. Court of Appeals for the Federal Circuit found that the disclosure of a preferred embodiment in a prior art reference does not teach away from a combination of prior art references that leads to the applicant’s invention, even when the combination is described as being inferior. In re Blaise Laurent Mouttet, Case No. 11-1451 (Fed. Cir., June 26, 2012) (Reyna, J.).

The applicant’s invention is directed to an arithmetic processor that included a nanoscale crossbar array of intersecting electrical wires with molecular switches formed at different intersections or “crosspoints.” During prosecution, the examiner rejected the application claims, relying on a combination of three prior art references, including a patent issued to Falk. Falk disclosed an arithmetic processor device similar to applicant’s processor, except that Falk’s device included a crossbar array having intersecting optical channels with programmable switches based on optical intensity, rather than electrical wires and programmable switches based on electrical conductivity. The other two references included a publication by Das that disclosed a nanoscale crossbar array of electrical wires and a patent issued to Terepin that disclosed an analog-to-digital converter, a necessary component of Mouttet’s device. After the Board affirmed the examiner’s rejections, the applicant appealed.

On appeal, applicant argued that substituting Falk’s optical channels with electrical wires would destroy the principle of operation and physical structure of Falk’s device and that Falk teaches away from an electrical crossbar array.

The Federal Circuit affirmed the Board’s determination that substituting Falk’s optical channels with electrical wires would not destroy its principle of operation was supported by substantial evidence. The Court also found that the nonequivalence of substituted elements is irrelevant, because obviousness determinations do not require “an actual, physical substitution of elements.”

The Court also found that the Board’s determination that Falk’s description of a preferred embodiment did not “teach away” was supported by substantial evidence, despite the fact that Falk described a “fundamental difference” between optical versus electrical circuits and “even suggests that electrical circuits are an [sic] inferior to optical circuitry for certain purposes.” The Court explained that this was not a sufficient reason to overturn the Board’s determination as applicant failed to cite to any evidence suggesting the claimed invention would be unlikely to work using electrical circuitry. The Court further emphasized that a known system, like the invention in this case, “does not become patentable simply because it has been described as somewhat inferior to some other product for the same use.”

Practice Note: In order to support a “teaching away” argument, a reference should provide a strong indication that the claimed subject matter or proposed combination would be unlikely to work or operate as intended.

Patents / § 337 (ITC)

The Federal Circuit Withdraws Its Prior Holding Concerning the Appealability of Issues that Are “Noticed” but Not Reviewed by the ITC
by Christopher G. Paulraj

In response to a petition for rehearing filed by the International Trade Commission (ITC), the U.S. Court of Appeals for the Federal Circuit has withdrawn its prior holding that a losing party in a § 337 investigation may appeal any decided issue adversely decided by the administrative law judge (ALJ) in an Initial Determination (ID), regardless of whether the ITC actually addresses the issue upon its review in a Final Determination. General Electric Co. v. International Trade Commission, Case No. 10-1223 (Fed. Cir., July 6, 2012) (Rader, C. J.) (Newman, J., dissenting). In Part III of the original panel decision, the Federal Circuit had rejected the ITC’s argument that issues in an ID that are “noticed” for review, but as to which the ITC takes “no position,” are not subject to further appeal. (see IP Update, Vol. 15, No. 3). The panel held that denying a losing party the right to appeal any adversely decided issue conflicts with the statutory right of judicial review.

The ITC filed a combined petition for reconsideration by the panel and rehearing en banc, in which it argued that the original panel decision was contrary to both the prior decision in Beloit Corp. v. Valmet Oy (1984) and the Administrative Procedure Act (APA). First, the ITC argued that the Federal Circuit’s decision in Beloit specifically contemplated that the ITC can reach its final determination on a “single dispositive issue,” while taking “no position” on the remaining issues in the case, and that the Federal Circuit “does not sit to review what the Commission has not decided.” Second, the ITC argued that, in accordance with the two-step decision-making process pursuant to the APA, once the ITC decides to review an issue from the ID, the ITC is entitled to either address it or take no position on it, but the issue can never become “not reviewed,” and it is the agency itself which disposes of the issue. According to the ITC, “Congress has not seen fit to provide that a Commission decision not to take a position on a reviewed decision, made by a majority of the Commission, should nevertheless be deemed to be an affirmance of the ALJ’s ruling on that issue.”

In its reconsideration order, the Federal Circuit stated that it was withdrawing the aspect of the opinion to which the ITC voiced objection, and that “[t]he panel offers no decision on the questions raised in Part III, which may arise in future case.” Judge Newman dissented from the decision to withdraw this section, which she said improperly “ratifies the commission’s authority to negate the finality of these final decisions, thereby forestalling judicial review and impeding the expeditious resolution of ITC proceedings.” Judge Newman urged that “[i]nstead of simply ratifying this aberrant procedure and accepting its consequences, at a minimum the court should take the case en banc and obtain input from the communities that Section 337 is designed to serve.”

Practice Note: The Federal Circuit’s withdrawal of this aspect of the GE v. ITC opinion could result in a spike in “piecemeal” litigation before the ITC. While the ITC has typically required ALJs to address all issues raised by the parties in their IDs, the Federal Circuit has now sanctioned an approach whereby the ITC may effectively shield more “thorny” issues from further judicial review to the extent resolution of those issues is not needed for the ITC’s final decision. If this approach becomes the norm, parties can expect an increase in the likelihood that the Federal Circuit might remand more § 337 investigations back to the ITC in order to address those issues as to which the ITC took “no position,” which could lead to an increase in the length and cost of the litigation.

Patents / Indirect Infringement

A Substantial Non-Infringing Use Does Not Preclude a Finding of Inducement
by Brett Bachtell

In affirming-in-part, vacating-in-part and remanding a lower court’s ruling, the U.S. Court of Appeals for the Federal Circuit found that a substantial non-infringing use does not preclude a finding of infringement by inducement. Toshiba Corp. v. Imation Corp. et al., Case No. 11-1204 (Fed. Cir., June 11, 2012) (Moore, J.) (Dyk, J. concurring-in-part and dissenting-in-part).

Toshiba accused Imation of infringing two Toshiba patents. The first patent was directed to optical disc technology and, more specifically, how data is written to a recordable DVD. The district court granted summary judgment of no indirect infringement (i.e., no contributory infringement or inducement) after concluding that recording data to a DVD without “finalizing” the DVD was a substantial non-infringing use. “Finalizing” a DVD allows the DVD to be read by different devices and infringes the first patent, whereas, not “finalizing” a DVD allows the DVD to be read only by the original device and allows a user to add additional information to the DVD.

The Federal Circuit affirmed the lower court’s ruling as it related to contributory infringement, but vacated the finding of no inducement of infringement. The Federal Circuit reasoned that the non-infringing use was substantial and supported summary judgment of no contributory infringement. However, the Federal Circuit found that the lower court erred in determining that a substantial non-infringing use precludes inducement of infringement. The Federal Circuit found that Toshiba’s arguments and related evidence that Imation designed recordable DVDs for use in an infringing manner and instructed users to use the DVDs in an infringing manner was sufficient to preclude summary judgment because a jury could reasonably conclude that, more likely than not, one person somewhere finalized the DVDs in an infringing manner.

The second patent was directed to a recordable DVD having a “management” region containing information about the structure of the DVD. The “management information” provides a computer with information about the number of recording planes on the DVD. The lower court construed the “management information” as “information whose purpose is to identify the number of recording planes on the recording medium.” Toshiba accused single-sided DVDs of infringement, and the lower court concluded that because single-sided DVDs contain information identifying the number of planes on only that single side, the accused DVDs do not infringe because the purpose of the information is to only identify the planes on one side of the DVD and not the entire recording medium.

The Federal Circuit disagreed with the lower court’s reading of embodiments of the specification into the claim. The Court determined that that the “language of the claim only requires that the information ‘represents’ the number of recording planes.”

In dissent, Judge Dyk found the “number of recording planes” limitation to require the identification of both the number of DVD sides and the number of layers per side, stating that “the specification and the prosecution history … make clear that the central objective of the patent was to identify whether an optical DVD was a one-sided DVD or a two-sided DVD.” Applying this construction, Judge Dyk would have affirmed the lower court’s summary judgment of non-infringement.

Patents / Judicial Estoppel

Judicial Estoppel Bars Flip-Flop Within the Same Case as to Ownership of Patents
by Sarika Singh, Ph.D.

Relying on the doctrine of judicial estoppel in determining the real party in interest, the U.S. Court of Appeals for the Second Circuit found that Intellivision’s founders improperly attempted to insert themselves into the litigation at the eleventh hour. Intellivision et al. v. Microsoft Corp., Case No. 11-1657 (2nd Cir., June 11, 2012) (Summary Order).

Intellivision sued Microsoft for fraudulent inducement, negligent misrepresentation and breach of fiduciary duty over a dispute relating to an agreement for assignment of patent applications. The plaintiffs brought suit in Connecticut by representing that Intellivision, having its principal place of business in Connecticut, was the owner and assignor of the patent applications. The district court denied a motion to dismiss in reliance on that representation, finding that Intellivision’s claims, although not viable in New York, were preserved in Connecticut. The plaintiffs persisted with these representations throughout the majority of the litigation, only to later reverse course and assert that the principals of Intellivision owned and assigned the patent applications in their individual capacity to avoid summary judgment in favor of Microsoft based on Connecticut’s statute of limitations.

The district court concluded that all three factors for judicial estoppel articulated by the Supreme Court in New Hampshire were satisfied: the party’s new position was “clearly inconsistent” with its earlier position, the party asserting the new position previously persuaded the court to accept its earlier position and (3) that party “would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Intellivision appealed.

The 2d Circuit, in affirming the district court, rejected the argument that plaintiffs’ position was not “clearly inconsistent,” citing the plaintiff’s contradictory arguments made in the motion to dismiss and the summary judgment motion. The court also rejected the argument that judicial estoppel requires a party’s position to have been adopted by a different court in a “prior separate proceeding.” The 2d Circuit, citing Supreme Court precedent, stated that judicial estoppel is a flexible equitable doctrine without fixed requirements and that judicial estoppel “generally prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.”

Practice Note: As judicial estoppel may not be limited to a “prior proceeding,” practitioners should consider the doctrine in analyzing their opponent’s inconsistent arguments in the midst of litigation.

Patents / Damages

Posner to Apple/Motorola: No Damages, No Injunction, No Trial
by Ryan N. Phelan

Judge Posner (of the U.S. Court of Appeals for the Seventh Circuit), sitting by designation, derailed Apple’s and Motorola’s expected patent liability trial when he found that both parties provided insufficient evidence to support either damages or injunctive relief. Apple, Inc. v. Motorola, Inc., Case No. 1:11-cv-08540 (N.D. Ill., June 22, 2012) (Posner. J.).

Apple had sued Motorola, alleging infringement of several of its patents related to touch screens and user interfaces for smartphones. Motorola counterclaimed with its own patents directed to cell phone communications. In a Daubert hearing, Judge Posner found inadmissible a majority of both parties’ proposed expert testimony on damages. In the aftermath, considering the parties’ follow-up briefs and oral arguments, Judge Posner addressed the evidentiary deficiencies for each of damages, injunctive and declaratory relief.

For damages, Judge Posner found that Apple had conceded that the excluded expert testimony precluded it from recovery of damages for two of its four remaining asserted patents. For one of its patents, Apple attempted to substitute its technical report for its damages report, but Judge Posner countered that the technical report merely “invite[d] guesswork” because it failed to properly estimate the percent value added by a particular computer chip that performed the patent functionality. Similarly, for its remaining patent, Judge Posner found that Apple’s damages calculation was incorrectly based on a stand-alone iPhone application that was not necessarily correlated to patent’s claims, e.g., extracting dates from text to create calendar entries. He also found that Apple could not remedy this deficiency by relying on “nominal damages”: “[y]ou can’t go into federal court and say you had a contract with X and [that] X broke it and you’re really annoyed even though you sustained no injury of any sort … so please give me a judgment for $1 that I can pin on my wall.” Federal courts require Article III “cases” and “controversies” for subject-matter jurisdiction. Finally, Judge Posner found that even § 284 provided no relief where Apple did not show admissible evidence sufficient to substantiate a “reasonable royalty.”

Motorola fared no better. Its one remaining patent in the case belonged to a portfolio that Judge Posner found Motorola had committed to license to anyone on a fair, reasonable and non-discriminatory (FRAND) basis (in return for the portfolio being dubbed by various standards organizations as “standard essential”). Judge Posner found that Motorola did not provide evidence sufficient for calculating a reasonable royalty consistent with its FRAND requirement and, similarly, did not provide a reason why Motorola’s remaining patent represented “up to” (or, later contradicting itself, “at least”) 40 to 50 percent of the entirety of the portfolio’s value.

Judge Posner also ruled that neither party proved entitlement to an injunctive relief. He stated that Motorola’s request for an injunction was nonsensical given its FRAND requirement to provide its patented technology to anyone—including Apple. And Apple’s request for an injunction “flunked” the eBay standards of irreparable injury, balance of hardships and public interest—Apple could not receive an injunction based merely on the speculative grounds of loss of consumer good will and market share, especially where the patent claims were directed to technology “worth very little” to consumers and were easy to invent around.

Judge Posner went on to find that the case exemplified “a simple failure of proof” on both sides. Injunctive relief is no substitute if money damages would have been an adequate remedy but where parties incurred “self-inflicted wound[s]” for lack of evidence on the same.

Thus he stated that declaratory relief would serve no purpose: “when the court has determined that neither party could obtain monetary or injunctive relief against the other, as in this case, a declaratory judgment in favor of either party would confer no tangible benefit on the victor and so there would be no federal subject-matter jurisdiction”—“the issuance of such a judgment would have no practical effect” —in short, no damages, no injunction, no trial.

Perhaps anticipating an almost certain appeal, Judge Posner ended by dismissing the case with prejudice, noting that “[i]t would be ridiculous to dismiss a suit for failure to prove damages and allow the plaintiff to refile the suit so that he could have a second chance to prove damages.” Judge Posner concluded that “[the parties] can’t obtain any benefit from further proceedings in this case but they can appeal its dismissal.”

Patents / Subject-Matter Eligibility

USPTO Issues Interim Examination Procedure for Subject-Matter Eligibility Analysis Under Prometheus
by Cynthia Chen, Ph.D.

In response to the Prometheus decision rendered by the Supreme Court, the U.S. Patent and Trademark Office (USPTO) issued its 2012 Interim Procedure for Subject Matter Eligibility Analysis of Process Claims Involving Laws of Nature (the “Interim Procedure”).

The Interim Procedure sets forth three “essential inquiries” in determining subject matter eligibility:

Inquiry No. 1: Is the claimed invention directed to a process, defined as an act, or a series of acts or steps? If no, this analysis is not applicable.
Inquiry No. 2: Does the claim focus on use of a law of nature, a natural phenomenon or naturally occurring relation or correlation (collectively referred to as a natural principle herein)? If no, this analysis is complete.
Inquiry No. 3: Does the claim include additional elements/steps or a combination of elements/steps that integrate the natural principle into the claimed invention such that the natural principle is practically applied, and are sufficient to ensure that the claim amounts to significantly more than the natural principle itself? (Is it more than a law of nature plus the general instruction to simply “apply it”?) If no, the claim is not patent-eligible and should be rejected.

Regarding Inquiry No. 2, a natural principle is defined as “the handiwork of nature [that] occurs without the hand of man,” such as the disinfecting property of sunlight; the relationship between blood glucose levels and diabetes; and a correlation that occurs naturally when a man-made product, such as a drug, interacts with a naturally occurring substance, such as blood. In particular, the Interim Procedure notes that “a claim that recites a correlation used to make a diagnosis focuses on a natural principle and would require further analysis” under Inquiry No. 3.

Regarding Inquiry No. 3, the Interim Procedure notes that the additional step must not be an “insignificant extra-solution activity” that imposes no meaningful limit on the performance of the claimed invention, such as an extra-solution activity that is unrelated to a natural correlation or does not integrate the natural correlation into the invention. In addition, elements or steps that are well-understood, purely conventional and routinely taken by others in order to apply the natural principle, or that only limit the use to a particular technological environment (field-of-use), would not be sufficient. The thrust of the analysis is that the claim must be limited so that it does not preempt the natural principle by covering every substantial practical application of that principle and that others are not foreclosed from using the natural principle for future innovation. The Interim Procedure lists several factors useful for analyzing the additional steps/features in the claims for the purpose of addressing Inquiry No. 3.

Practice Note: The Interim Procedure will predominantly impact patent applications examined in Technology Center 1600, in particular, claims directed to diagnostic or screening methods, such as claims reciting a correlation between a biomarker and a disease risk. Applicants should present arguments or amendments to show that the claims at issue are limited in scope, such that it does not preempt a natural principle and that others are not foreclosed from using the natural principle. A showing that a particular step/feature is not routine, well-known or conventional will also be helpful. Whether these guidelines will be subject to further revision in view of the Federal Circuit decision in CLS Bank International v. Alice Corp., (see IP Update, this issue) remains the same.

Trademark / Likelihood of Confusion

Non-Consumer Confusion May Factor into “Likelihood of Confusion” Analysis
by Sara Sunderland

Ruling that non-sales activities may be considered “use in commerce” and that non-consumer confusion may be a proxy for evidence of consumer confusion, the U.S. Court of Appeals for the Ninth Circuit vacated summary judgment of claims under the Lanham Act, the Anticybersquatting Consumer Protection Act (ACPA) and California state claims of trademark infringement and unfair competition. Rearden LLC v. Rearden Commerce, Inc., Case No. 10-16665 (9th Cir., June 27, 2012) (Cowen, J.).

This dispute centered around the use of “Rearden” in the names, marks and domain names of both companies. Hank Rearden is a character in Ayn Rand’s novel Atlas Shrugged. Rearden LLC is a technology incubator that provides resources for start-up companies. Rearden Commerce is a business concierge company providing a web-based personal assistant service that links clients with vendors of a variety of services.

The 9th Circuit stated that not only is summary judgment disfavored in trademark actions because of the factual nature of trademark disputes, a grant of summary judgment based on the “likelihood of confusion” analysis is particularly disfavored. The 9th Circuit found several genuine issues of material fact that precluded summary judgment in the evaluation of both the “use in commerce” threshold requirement and the Sleekcraft factors used to determine the “likelihood of confusion.”

The court considered the totality of circumstances to determine if the “use in commerce” element was satisfied. The court acknowledged the potential relevance of non-sales activities such as solicitation of potential customers. Though Rearden Commerce presented evidence that the only services Rearden LLC provided was to other Rearden entities, the court remarked that there exists genuine issues of material fact as to whether Rearden LLC had provided services to at least one outside entity. Further, Rearden LLC provided evidence of enough non-incubation services, such as inclusion in movie credits for furnishing motion capture services, to preclude summary judgment on “use in commerce” grounds.

In determining the “likelihood of confusion,” the court noted that the Sleekcraft factors should be applied in a flexible fashion as the factors are a proxy for consumer confusion, not a checklist. The court noted two incidents of actual confusion: emails sent to Rearden LLC by Rearden Commerce customers that were intended to be sent to Rearden Commerce and a customer who received a subpoena in connection with this action expressed confusion as to which Rearden company had conducted business.

The court rejected Rearden LLC’s theory that confusion of “non-purchasing consumers” can support a finding of “likelihood of confusion.” The court instead consolidated reasoning from prior decisions and ruled that confusion on the part of potential consumers, non-consumers whose confusion could create an inference that consumers are likely to be confused and non-consumers whose confusion would influence consumers are relevant in the analysis to determine “likelihood of confusion.”

Practice Note: Brand owners should consider evidence of non-sales activities to assist in proving “use in commerce.” Additionally, evidence of non-consumer confusion can support a finding of “likelihood of confusion.”

Trademark / Infringement

Halftime Score: Artist 1; ’Bama 0
by Jeremy T. Elman

Addressing the issue of trademark licensing and infringement, the United States Court of Appeals for the Eleventh Circuit affirmed in part and reversed in part a district court’s ruling that an artist who depicted the University of Alabama’s football teams in paintings had infringed on the university’s trademarks, the appellate court finding the artist’s works were protected by the First Amendment as artistic expression that only used the trademarks as necessary to artistically depict famous football images and therefore did not infringe the university’s trademarks. The University of Alabama Board of Trustees v. New Life Art, Inc., Case No. 10-10092 (11th Cir., June 11, 2012) (Anderson, J.)

Artist Daniel Moore has painted famous football images related to the University of Alabama since 1979, selling paintings and related commercial items such as mugs, prints and calendars featuring his paintings. The university was aware of these items as early as 1980, but did not seek licensing fees or assert any intellectual property rights until the mid 1990s. The university did buy some of Moore’s artwork throughout these years. Eventually the university required Moore to sign license agreements to produce certain items using the university’s trademarks in exchange for royalties. In the early 2000s the university asked Moore to sign additional license agreement relating to the football uniforms of the university, in exchange for royalties, which Moore refused. The university then brought both breach of licensing and trademark claims against Moore and his company, New Life Art. After the district court found for the university on its claims, Moore appealed.

The 11th Circuit divided the issue into two categories: Moore’s paintings, prints and calendars (collectively referred to as “paintings”), and the more “mundane” items, such as mug and t-shirts. The 11th Circuit remanded certain issues relating to the “mundane” items back to the district court, but reversed the district court’s ruling that the paintings were covered by the license agreement and that they infringed the university’s trademarks.

As to the trademark claims regarding the paintings, the 11th Circuit found that Moore’s First Amendment rights to artistic expression trumped the university's trademark rights, since it was clear that these were Moore’s paintings and not those of the university. Citing the U.S. Court of Appeals for the Second Circuit Rogers v. Grimaldi case and others, the Court explained that trademark rights must be narrowly drawn to avoid impinging on an artist’s First Amendment rights. As the court explained: “an artistically expressive use of a trademark will not violate the Lanham Act unless the use of the mark has no artistic relevance to the underlying work whatsoever, or, if it has some artistic relevance, unless it explicitly misleads as to the source or content of the work.” Since the university’s uniforms were needed to depict the famous football images created by the artist and extent of the use was limited to the artist’s need to depict the famous football images in issue, the 11th Circuit concluded there was no trademark infringement.

As to licensing claims regarding the paintings, the court held that Moore’s paintings did not fall under the license agreements because they were not “licensed indicia” that could accommodate trademark registration symbols nor could the trademark be placed on any “products.” The court also noted in passing that the university did not require Moore to pay royalties for such paintings throughout the 1990s.

Practice Note: Artistic expression is broadly protected under the First Amendment, while trademark rights are narrowly construed to protect only customer confusion created such expression. When in conflict, the First Amendment will prevail unless the use explicitly misleads the public.

Trademark / Domain Name

Domain Name Administrator Is Not a Domain Name Registry for Jurisdictional Purposes
by Paul Devinsky

The U.S. District Court for the District of Columbia has now held that in order to qualify as a domain name authority for purposes of in rem jurisdiction under the Anti-cybersquatting Consumer Protection Act (ACPA), an entity must perform the functions of assigning and registering domain names. Vizer v. Vizernews.com, Case No. 1:11-cv-00864 (DDC, June 22, 2012) (Howell, J.).

Plaintiff Marius Vizer brought suit against defendant in federal court in the District of Columbia, asserting in rem jurisdiction under the ACPA based on the existence of an ICANN location in the district. Under § 1125 (d)(2)(A) of ACPA a trademark owner can file an in rem suit against a domain name “in the judicial district in which the domain name registrar, domain name registry or other authority that registrant or assigned the domain name is located.” (Emphasis supplied.)

Although Vizernews.com made no appearance, in the case, the district court, sua sponte, raised the jurisdictional question as to whether ICANN, which maintains an office in Washington, D.C., qualifies as a “domain name authority,” in response to Vizer’s motion for a default judgment. In concluding that the court lacked jurisdiction in rem, Judge Howell noted that ICANN does not sell or register domain names, it only administers the process. The case was dismissed.

Copyright / Exhaustion

Is the Second-Hand Sale of Software Licenses Allowed in Europe?
by Alexander Harguth

The Court of Justice of the European Union has now ruled that software developers may no longer block the resale of online licensed software. UsedSoft GmbH v. Oracle International Corp., Case C-128/11 (CJEU, July 3, 2012). This new development will significantly affect the market strategies of software developers.

Facts

Internet software sales, whereby the customer directly downloads software from the developer’s website, have become a common transaction mode. Such sales eliminate the need for a physical carrier for the software, such as a DVD or CD-ROM. As a consequence, second-hand sales have become a significant challenge for developers, who try to exclude such sales by outlining relevant restrictions in their licensing agreements. Specifically, typical click-through terms give a customer the right to use the software and to permanently store a copy of it on his computer. The terms also enable the use of the software by a limited number of users (e.g., employees), but the customer’s rights are non-transferable. In other words, the click-through license terms typically provide that software is usable only for the customer’s own business purposes, but prohibit resale of the license rights to someone else. However, under certain circumstances, such as cuts in business segments or insolvencies, an internet-based software customer may be interested in selling its license. Second-hand dealers, such as UsedSoft, model their businesses based on such situations. Despite the non-transferability stipulation in the license agreements, they buy these licenses with the intent of selling them (for a significantly lower price) into a second-hand market.

Business Model at Issue

The reseller (the original licensee) provides a written document stating that he is entitled to use the software by virtue of an agreement. In addition, the reseller declares that he no longer intends to use the software. No further proof of the reseller’s entitlement to resell the license is provided. The second-hand dealer forwards this declaration to a notary, who notarizes that the reseller’s declaration was presented to him, without naming the reseller. The notarized statement together with an agreement prepared by the dealer is then used to resell the software. The new customer directly procures the software from the reseller. Oracle launched proceedings against UsedSoft in an attempt to stop such business. Oracle relied on the non-transferability clause of the license agreement as the basis for its argument.

Opinion of the CJEU

The crux of the decision hinges on the issue of copyright exhaustion. If rights are exhausted, the non-transferability clauses found in a typical license has no effect. For off-the-shelf software sold on physical carriers, it is accepted that once the developer sells the carrier, its exclusive distribution rights are exhausted and the acquirer may resell the software to anyone. Whether this also applies to software acquired through downloading from the developer’s website is the question posed. German courts were of the opinion that such dealings violate the developer’s copyrights.

The highest German Court then referred the question to the CJEU which has now ruled that, once the developer had sold a copy of his software, its exclusive distribution rights as to that copy are exhausted regardless of whether it is done through a download or on a carrier. On the other hand, where the copy is resold, the original customer is no longer allowed to use the software and must make its copy unusable at the time of resale. In addition, the CJEU pointed out that if the license acquired by the first customer relates to a greater number of users, the effect of the exhaustion of the distribution right cannot be used to divide the license and resell only a part of it. In addition, the CJEU ruling does not force the developer to provide support, particularly when it comes to updates, to purchasers of second-hand licenses.

Consequences

The CJEU’s ruling will likely stimulate growth in the secondary market, but there may also be some negative consequences for developers. For example, developers will no longer be able to rely on their records to determine who owns a license. This is because the resale documents in the hands of the second-hand customer do not indicate the name of the first customer. The developer will also lack the ability to determine whether the license to the original customer was in fact legally acquired, and there are no effective means for the developer to ascertain whether or not the first customer is still using the software (i.e., after the license was resold). Enterprise software developers should review their license practice and investigate whether the situation may be addressed by remedial clauses being introduced into their new contracts, for instance, to require that the developer be notified in the event of any change in license ownership.

Copyright / Contracts / Preemption

Alleged Breach of Implied-in-Fact Contract for Use of a Television Show Idea Not Preempted by Copyright Act
by Raymond M. Gabriel and Sarah Bro

In vacating a district court’s grant of a motion to dismiss a breach of contract action against a television studio, the U.S. Court of Appeals for the Second Circuit held that the Copyright Act does not preempt a breach of an implied-in-fact contract that included a promise to pay for an idea. Forest Park Pictures v. Universal Television Network, Inc., Case No. 11-2011-cv (2d Cir., June 26, 2012) (Walker, J.). The decision makes it more difficult for television and movie studios to obtain summary dismissal of suits claiming idea theft.

In 2005, Forest Park Pictures and brothers Tove and Hayden Christensen (of Star Wars fame) formulated an idea for a television show about a doctor who caters to the rich and famous in Malibu, California as a “concierge” house call doctor. They created a written series treatment for the idea, including character biographies, themes and stories, which they mailed to a representative at USA Network, a division of Universal Television Network, Inc.

Forest Park and the brothers requested and met with USA Network’s representatives to pitch their show. Within a week discussions ceased and the parties stopped communications. Several years later, USA Network produced a show “Royal Pains,” about a doctor who caters to the rich and famous in the Hamptons.

Forest Park and the brothers sued USA Network for breach of an implied-in-fact contract for failing to pay for the show idea. USA Network moved to dismiss the complaint on the grounds that the Copyright Act preempted the claim and that the contract claim was too vague to be enforced. The district court agreed and dismissed the complaint without addressing the contract issue. Forest Park appealed.

Holding that breach of an implied-in-fact contract is not preempted by the Copyright Act, the 2d Circuit vacated the decision of the district court. The 2d Circuit noted that the Copyright Act preempts a state law claim only if the work at issue comes within the subject matter of copyright and if the right being asserted in the claim is equivalent to any of the exclusive rights granted under copyright law. Because the subject of the claim, i.e., the ideas presented in Forest Park’s treatment, were fixed in a writing, the work was found to be within the subject matter of copyright, thereby meeting the first requirement for preemption. The “equivalency requirement,” however, was not met because “[a] claim for breach of a contract including a promise to pay is qualitatively different from a suit to vindicate a right included in the Copyright Act and is not subject to preemption.”

With respect to the breach of contract issue, the 2d Circuit decided that California law was applicable to determine whether Forest Park pleaded an enforceable implied-in-fact contract, as nearly all of the activity related to the alleged contract took place in the state of California, including the location of the plaintiffs’ meeting with USA Network and the physical location of the written series treatment. The 2d Circuit then cited the Desny v. Wilder decision, which California courts have used to recognized implied-in-fact contracts since the 1950s if a plaintiff can prove that an idea was submitted on the condition that the plaintiff would be paid for use of the idea and the defendant knew or should have know of that condition.

In its complaint, Forest Park alleged that it is standard in the entertainment industry to receive compensation for the use of a party’s pitched ideas. Because Forest Park alleged facts that, if proven, would establish that USA Network knew or should have known that Forest Park submitted its series treatment based on a promise of payment, the 2d Circuit found the complaint alleged an enforceable contract. Accordingly, the district court’s decision was vacated and remanded for further proceedings on the contract issue.

Practice Note: Television and movie studios hoping to exit breach of contract suits alleging idea theft early on now face a new challenge. Going forward, this decision, which disposes of the copyright pre-emption argument, may force studios to litigate the merits of a breach of contract claim.

Copyright / Damages

Ex-Guitarist Must KISS Royalties Goodbye to Satisfy Judgment
by Elisabeth (Bess) Malis

In an unpublished ruling, the U.S. Court of Appeals for the Ninth Circuit held that a district court did not err in holding that former KISS guitarist Vinnie “Vinnie Vincent” Cusano must surrender KISS royalty earnings to former bandmate Gene “Gene Simmons” Klein in order to cover Klein’s attorneys’ fees from a royalty dispute Cusano lost in 2003. Cusano et al. v. Klein et al., Case No. 06-56871 (9th Cir., May 8, 2012) (Nelson, J.; Fisher, J;. Christen, J).

In 2003, Cusano sued his former KISS bandmates and record label alleging unpaid royalties owed for compositions he co-wrote with the band in the 1980s. The district court granted summary judgment in favor of the defendants and awarded Klein a substantial attorneys’ fees award. When Klein sought to recover such fees from Cusano’s royalty income stemming from the KISS compositions, Cusano argued in multiple appeals that his song royalties are protected from levy by federal and state law.

Consolidating Cusano’s various appeals, the 9th Circuit affirmed the district court’s attorneys’ fees award and held that Cusano’s royalty payments were not immune from collection to satisfy the 2003 judgment. The court found unpersuasive Cusano’s assertion that song royalties are shielded by federal and state statutes that protect from garnishment 75 percent of an individual’s weekly “earnings”. The court reasoned that the relevant statutes defined “earnings” as compensation for “personal services,” and Cusano offered no proof that continuing royalty payments are compensation for personal services.

The court also held that the district court did not abuse its discretion by denying Cusano’s various motions to invalidate the 2003 judgment. Cusano’s 2006 motion for reconsideration and 2010 motion to vacate were untimely filed, as such motions must be made within one year after the entry of the judgment.

Affirming the district court ruling, the 9th Circuit held that Klein may recover 100 percent of Cusano’s song royalty payments in order to satisfy the attorneys’ fees award in the 2003 judgment.

Copyright / Reasonable Royalty

Direct Licenses Should Be Considered in Determining Reasonable Royalty for Performing Rights Organizations
by Rose Whelan

The U.S. Court of Appeals for the Second Circuit held that rate courts can take into account direct license rates when determining reasonable royalties due to performing rights organizations in Broadcast Music Inc. v. DMX, Inc., Case Nos. 10-3429; 11-127 (2d Cir., June 13, 2012) (Chin, J.).

The American Society of Composers Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) are performing rights organizations, which each represent songwriters, composers and publishers who hold copyrights in musical works. They negotiate agreements that grant licensees the right to perform their members’ copyrighted songs. DMX is a commercial music provider that provides music services locations such as restaurants and retail stores.

The United States previously brought antitrust actions against both ASCAP and BMI that resulted in consent decrees providing certain protections for prospective music licensees. Under these agreements, if a prospective licensee and ASCAP and BMI reach an impasse, either may petition the district court to set a “reasonable” licensing fee.

Such an impasse was reached separately between DMX and both ASCAP and BMI. A significant cause of this impasse was DMX’s recent practice of negotiating direct licenses with ASCAP and BMI members. DMX proposed a blanket license that incorporated its direct licensing program into its proposed fee structure and relied on its negotiated rates with direct licenses to arrive at a reasonable royalty amount. ASCAP’s first proposed a blanket license that did not take into DMX’s direct licensing program. ASCAP’s alternative proposal and BMI’s proposal both accounted to some extent for DMX’s direct licensing program, but both gave more weight to other court-mandated reasonable royalties reached with DMX’s competitors, none of which engaged in direct licensing. In both cases the district court adopted DMX’s proposals. ASCAP and BMI appealed.

On appeal, ASCAP and BMI argued that the district court erred by adopting DMX’s reliance on its direct licenses.

First, ASCAP argued that a rates structure with an adjustable carve-out for direct licenses conflicted with its consent order. The 2d Circuit disagreed, finding that although the consent order defined four specific types of licenses and did not specifically provide for an blanket license with a carve out, it also stated nothing “shall prevent ASCAP and any music user from agreeing on any other form of license.” This language permitted a blanket license subject to carve-outs to account for direct licensing.

Second, both ASCAP and BMI argued that the district court erred by using DMX’s direct licensing agreement with music publishers as a benchmark and that their licenses with DMX’s competitors were more accurate benchmarks. The appeals court rejected this contention, finding that ASCAP’s and BMI’s agreements with DMX’s competitors were not an accurate assessment of the competitive market as to DMX. Noting “that the rates set by the ASCAP and BMI rate courts were comparatively lower than those historically obtained by ASCAP and BMI is of no moment given ASCAP and BMI’s longstanding market power and the industry’s changing economic landscape,” the 2d Circuit affirmed the lower courts reliance on DMX’s direct licenses as a more reasonable benchmark of the competitive market.

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IP Update, Vol. 15, No. 7, July 2012

Expand Your Reach