IP Update, Vol. 15, No. 8, August 2012

In the wake of the U.S. Supreme Court decision in Mayo Collaborative Services v. Prometheus Labs (see IP Update, Vol. 14, No. 6.) the struggle continues for the proper analysis to determine patent-eligible subject matter if a patent claim is directed to a non-patent-eligible “abstract idea.” In a post-Prometheus case, after eliminating the non-integral limitations regarding computer use, the U.S. Court of Appeals for the Federal Circuit determined that Bancorp’s method, system and medium claims regarding the administration and tracking of the value of life insurance policies in separate accounts contained the equivalent non-patentable abstract “inventive concept” and affirmed the district court’s holding of invalidity under 35 U.S.C. § 101. Bancorp Services, L.L.C. v. Sun Life Assur. Co. of Canada (U.S.), Case No. 11-1467 (Fed. Cir., July 26, 2012) (Lourie, J.).

Initial Claim Construction

Before proceeding with its § 101 analysis, the Federal Circuit concluded that Bancorp’s system and media claims required particular computer devices or computer-readable media, as conceded by the parties. However, the Court applied the doctrine of claim differentiation to construe the independent method claims as not requiring implementation on a computer since the computer-use limitations were found only in the dependent claims.

Computer-Based Limitations to Abstract Ideas

In analyzing whether Bancorp’s method claims were merely patent-ineligible abstract ideas, the Court noted that the limitation “using a computer” in an otherwise abstract concept must “play a significant part in permitting the claimed method to be performed.” Under that premise, the Court recognized that it was the management of the life insurance policy that was integral to each of Bancorp’s claims at issue, not the computer machinery that may be used to accomplish it, and concluded that there was no material difference between Bancorp’s claims and the claims invalidated in Bilski. (See IP Update, Vol. 11, No. 11.) Setting aside the computer-based limitations, the Court stated that the only features remaining are claims for performing calculations and manipulating values—matters of mere mathematical computation.

Is the Name of the Game Still the Claim?

Even though the system and medium claims contained tangible objects and are non-abstract per se, the Court determined that the “inventive concept” was equivalent with the abstract method claims and, therefore, did not change the patent eligibility analysis under § 101. The Court cited Cybersource (IP Update, Vol. 14, No. 9) and CLS for the proposition that a machine, system, medium or the like may in some cases be equivalent to an abstract mental process for purposes of patent ineligibility. However, in CLS (see IP Update, Vol. 15, No. 7), the majority specifically rejected this type of analysis stating that “[p]atent eligibility must be evaluated based on what the claims recite, not merely on the ideas upon which they are premised.”

In CLS, 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 § 101. The CLS majority criticized the “inventive concept” approach cited in the dissent by Judge Prost (a member of the Bancorp panel) and explained that “ignoring claim limitations in order to abstract a process down to a fundamental truth is legally impermissible.” They noted that the Supreme Court’s reference to an “inventive concept” in Prometheus could not be read to endorse overlooking the actual terms of the claims or the distillation of claim language to mere generalities. The CLS 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.”

Arriving at a contrary result, the panel in Bancorp explained that its decision is not inconsistent with CLS for multiple reasons. First, the district court in Bancorp evaluated the limitations of the claims as a whole before arriving at invalidity. Second, unlike CLS where the majority was unable to conclude that the computer limitations did not play a significant part in the performance of the invention, the panel in Bancorp affirmatively concluded that the computer limitations did not play a “significant part.” Finally, Bancorp sought to broadly claim the concept of managing a stable value protected life insurance policy where CLS’s claims were restricted to a “very specific application” of their concept.

Practice Note: There is a clear split among panels of the Federal Circuit regarding the correct approach to determining patent eligibility under § 101. In order to survive under either a CLS or Bancorp analysis, practitioners must be able to identify how the use of a computer plays a “significant part” in the implementation of a claimed business method and most sufficiently recite that implementation in the claims.

Patents/ Enablement of Prior Art

Prior Art Publications Entitled to Presumption of Enablement
by Amol Parikh

Affirming the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences (the Board) decision upholding a patent examiner’s rejection of the claims during the reexamination, the U.S. Court of Appeals for the Federal Circuit held that prior art printed publications cited by an examiner during prosecution are presumptively enabling. In re Antor Media Corp., Case No. 11-1465 (Fed. Cir., July 27, 2012) (Lourie, J.).

Antor owns a U.S. patent relating to a method and apparatus for transmitting information recorded on digital disks from a central server to subscribers via a high data rate telecommunications network. The goal of the patent is to allow subscribers to access and receive information—digital media such as music, images, documents, video, and software—stored on information systems over a telecommunications network. The USPTO granted ex parte reexamination and rejected the claims as being anticipated and obvious based on four separate prior art references and their various combinations. Three of the prior art references were printed publications (referred to respectively as the “Ghafoor reference,” the “MINOS reference” and the “Huang reference”). The remaining prior art reference was a U.S. patent.

Antor appealed the PTO’s finding to the Board of Patent Appeals and Interferences arguing that the claims of its patent were not anticipated or obvious in light of two of the printed publications because those references were not enabling. The PTO did not submit any rebuttal evidence on the issue. The Board nevertheless upheld the PTO’s finding holding that Antor had not shown that the Ghafoor and MINOS references were not enabling or required undue experimentation. Antor appealed the Board’s decision to the Federal Circuit.

On appeal, Antor argued that the Board erred by holding that prior art publications cited by an examiner are presumptively enabling during prosecution. Antor argued that the presumption of enablement is applicable to only prior art patents, not to publications, because the PTO must examine patents for enablement before they issue. The Court squarely rejected Antor’s argument. The Court recalled its decision in Amgen v. Hoechst Marion Roussel, where it found that in the context of a prior art patent, both claimed and unclaimed materials disclosed in the patent are presumptively enabling. The Court noted that unlike claimed disclosures in a patent, unclaimed disclosures are not examined by the PTO, yet these unclaimed features still receive a presumption of enablement during prosecution of a later patent.

Recognizing that printed publications lack the same scrutiny of examination as unclaimed features in a patent, the Court found it logical that printed publications should receive the same presumption of enablement. Accordingly, the Court held that during prosecution, the PTO is entitled to reject claims by a prior art publication or patent without conducting an inquiry into whether or not the prior art reference is enabling. As long as the PTO makes a proper prima facie showing of anticipation, the burden shifts to the applicant to submit rebuttal evidence of non-enablement.

Turning to the merits of Board’s ultimate decision that the claims of the ’961 patent were unpatentable, the Court found that the Antor had not rebutted the presumption of enablement of the cited prior art publications because it had not shown that undue experimentation would be need to practice the various limitations of its patent claims based on the disclosure in the cited prior art publications. Accordingly, the Court affirmed the Board’s decision.

Patents / Prosecution Disclaimer

Statements Made During Reexamination Can Be Used to Limit Claim Scope
by Jung W. Kim

Considering the issue of prosecution disclaimer, the U.S. Court of Appeals for the Federal Circuit found that a patentee’s statements during reexamination did not unambiguously disavow or clearly describe the structure of a claim term in dispute, and thus did not limit the scope of the claim term. Grober et al. v. Mako Products, Inc. et al., Case Nos. 10-1519; -1527 (Fed. Cir. July 30, 2012) (Rader, C. J.).

David Grober won an Academy Award in technical achievements for his platform that stabilizes a camera for filming motion pictures, known in the industry as Perfect Horizon. Grober received a patent that covers his camera stabilizing platform. After Grober filed suit alleging that Mako’s MakoHead product infringed the patent, Mako commenced an inter partes reexamination of the patent at the U.S. Patent and Trademark Office (PTO) and the district court case was stayed. After the reexamination concluded, the district court stay was lifted and claim construction commenced.

The claim term in dispute was “payload platform.” During the reexamination Grober distinguished his invention from the prior art by explaining that the prior art does not teach fixing or mounting sensors to a prior art element that the examiner associated with the claim term “payload platform.” Relying heavily on the reexamination proceedings, the district court construed the term to mean “the horizontal plate, piece of surface upon which the device (e.g., a camera) is direct mounted upon or affixed to.” Based on its claim construction, the district court found that MakoHead did not infringe. Grober appealed.

In reviewing the claim construction de novo, the Federal Circuit vacated the district court’s construction and remanded the case for further proceedings. The Court held that “[w]hen a patentee makes a clear and unmistakable disavowal of scope during prosecution, a claim’s scope may be narrowed under the doctrine of prosecution disclaimer.” However, while the Court acknowledged that this doctrine also applies to statements made during reexamination proceedings, the Court emphasized that the doctrine “only applies to unambiguous disavowals.”

With reference Grober’s statements to the PTO, the Court found that “[t]hese statements do not address the characteristics of the claimed payload platform limitation.” Rather, the Court explained that Grober’s statements referenced the prior art element in discussing the location of the sensors. The Court concluded that Grober’s statements which referenced the prior art are not an unambiguous disavowal that clearly and unmistakably disclaims claim scope or meaning, and thus the district court improperly limited the scope the disputed claim term.

Patents / Claim Construction

Singular Claim Terms Are Plural in Scope Unless There Is Clear Intent to the Contrary
by Alexander P. Ott

Addressing the issue of whether a claimed “location facility” drafted in the singular covered software distributed over multiple computers, the U.S. Court of Appeals for the Federal Circuit reiterated that singular words such as “a” and “an” in patent claims mean “one or more” unless the patentee showed clear intent to limit to “one.” 01 Communique Lab v. LogMeIn, Case No. 11-1403 (Fed. Cir., July 31, 2012) (Fogel, J., sitting by designation).

After construing the term “location facility,” the district court granted summary judgment of non-infringement. All asserted claims included “a locator server computer” that “includes a location facility,” which carries out four specific functions. The district court concluded that certain statements made during reexamination limited the claimed “location facility” to being contained in a single physical computer and granted summary judgment of non-infringement in favor of LogMeIn because its system did not contain any single component that performs all four claimed functions. 01 Communique appealed.

On appeal, the Federal Circuit noted that LogMeIn’s position was at odds with the well-established principle that the words “a” and “an” mean “one or more” unless the patentee evinced a clear intent to limit “a” or “an” to “one.” Relying on teaching in the specification that the “Server computer 12 may comprise one or more computers” and “such facilities can be sub-divided into separate facilities,” the Federal Circuit held that the specification supports a construction of "location facility" that encompasses a facility distributed among multiple physical computers.

Turning to whether prosecution disclaimer precludes such a result, the Court noted that the statements relied on by the district court did not clearly and unambiguously disclaim distributing the location facility over more than one computer. The Federal Circuit understood the argument made during reexamination to merely mean that the claims require that the location facility actually create the communication channel (one of the four claimed functions) and would not be satisfied by mere use of the location facility by some component other than the location facility, such as a personal computer, that then creates the channel itself.

The Federal Circuit also rejected LogMeIn’s argument that the cancellation of a rejected claim—which specifically defined “location server computer” to encompass multiple computers—disclaimed coverage of using multiple computers. The Court explained that because cancelled claim stood rejected only because it depended on another claim rejected for an unrelated reason, the patentee’s cancellation of the claim and the claim it depended upon did not amount to a disclaimer of multiple computers. The Court noted the examiner’s statements that several other claims covering multiple computers were supported because the specification “never defined that the locator server computer or server computer comprises a singular component” and “defines that the server computer comprises one or more computers.”

Patents / Assignments

Continued Employment Is Sufficient Consideration for IP Assignment Agreements
by Eric Garcia

Addressing the issue of patent ownership in the employment context, the U.S. Court of Appeals for the Federal Circuit found that an employment contract executed after the employee began working for the employer operated to automatically assign the rights to two patents to the employer with no additional consideration other than continued employment. Preston v. Marathon Oil Co., Case Nos. 11-1013; -1026 (Fed. Cir., July 10, 2012) (O’Malley, J.).

Yale Preston, who began work for Marathon in March 2001, received a letter outlining his employment at-will with Marathon in February 2001. After he began working for Marathon, Preston executed an employment agreement that contained an intellectual property assignment provision. In that post-employment agreement, Preston identified a “CH4 Resonating Manifold” as an invention that was to be excluded from the assignment provisions. Marathon did not provide any additional consideration to Preston for signing the post-employment agreement beyond his continued employment.

From 2002 to 2003, in the context of his employment for Marathon, Preston worked on a baffle plate system used in methane gas extraction. Preston drafted conceptual drawings, met with Marathon’s engineers, engaged a third-party to manufacture baffle plates and managed the installation of the baffle plates in Marathon gas wells. Preston left Marathon in April 2003. After Preston left Marathon, both Marathon and Preston sought and received patents covering the baffle plate system.

Preston filed a lawsuit asserting, among other things patent infringement, a declaration that he is the sole inventor of the Marathon patent-at-issue and unjust enrichment based on Marathon’s use of his invention. The case presented the question of who owned two patents directed to the use of the baffle plate system.

After the district court ruled in Marathon’s favor in several summary judgment motions, Preston appealed. Preston challenged whether Preston’s continued at-will employment constituted sufficient consideration to support the assignment provisions contained in the post-employment employment agreement. The Federal Circuit certified the question to the Wyoming Supreme Court, which held that continued employment was sufficient consideration under Wyoming law. Accordingly, the Federal Circuit held that the April employment agreement was valid and enforceable.

Preston also argued that the post-employment agreement did not apply to his baffle plate system invention because he had expressly excluded the invention by noting “CH4 Resonating Manifold” as an excluded invention in the post-employment agreement. However, the Federal Circuit found that the invention could not be excluded from the scope of the assignment because Preston did not conceive of or make the invention prior to employment. The Federal Circuit found that Preston was not able to demonstrate that he had actually conceived of the invention beforehand, stating that the evidence presented by Preston showed that prior to his employment he had no more than “a vague idea” of the concept. Thus, the Federal Circuit concluded that Preston was unable to corroborate his claim of prior conception, while Marathon provided substantial testimony to the contrary. Accordingly, the Federal Circuit held that Preston did not expressly exclude the subject invention from the assignment provisions.

Patents / Licensing

No-Challenge Clauses Do Not Bar Later Challenges to Patent Validity
by Gabriel Daniel

Addressing contracts law in the context of patent licensing, the U.S. Court of Appeals for the Second Circuit held that a provision of a patent license purporting to bar future challenges to the validity of the licensed patent is unenforceable. Rates Tech. Inc. v. Speakeasy Inc. et al., Case No. 11-4462 (2d Cir., July 10, 2012) (Lynch, J.).

Plaintiff Rates Technology owned two patents directed to automatic routing of telephone calls based on cost. In 2007, Rates notified defendant Speakeasy of alleged patent infringement. Later, Speakeasy took a license to the patents. The license included a provision purporting to bar Speakeasy from ever challenging the validity of the patents.

In 2010, Rates notified defendant Covad of alleged patent infringement of the same patents. At that point, Speakeasy had been acquired by Covad. Covad filed a declaratory judgment action for patent invalidity. Rates, in return, initiated the present lawsuit, arguing breach of the no-challenge clause of the Rates-Speakeasy 2007 license.

The 2d Circuit ruling clarified the 1969 U.S. Supreme Court decision in Lear, which held that a patent licensing agreement cannot bar a licensee from later challenging the patent’s validity. In Lear, the Supreme Court found that the public interest of filtering out invalid patents outweighs the concern for contract law, departing from the doctrine of licensee estoppel, which did not allow a licensee to challenge patent validity.

Rates, citing post-Lear cases that upheld no-challenge clauses, argued that the strong public interest in settling ongoing litigation can justify the enforcement of no-challenge clauses that might otherwise be deemed invalid under Lear. Rates further argued that Lear is limited to continuing royalty payments, and not, as in this case, to a one-time cash payment. The 2d Circuit disagreed.

Recognizing the need to balance the policy concerns articulated in Lear with the competing policy interests in favor of holding parties to their contracts, the 2d Circuit adopted a broad reading of the Supreme Court’s decision in Lear. The 2d Circuit stated that the cases upon which Rates relied dealt with no-challenge clauses that had been negotiated after the parties had engaged in litigation over the validity of the asserted patents. In contrast, Rates had licensed its patents to Speakeasy before any litigation had begun.

The 2d Circuit explained that “[o]nce an accused infringer has challenged patent validity, has had an opportunity to conduct discovery on validity issues, and has elected to voluntarily dismiss the litigation with prejudice under a settlement agreement containing a clear and unambiguous undertaking not to challenge validity and/or enforceability of the patent in suit, the accused infringer is contractually estopped from raising any such challenge in any subsequent proceeding.” However, when parties enter an agreement in a pre-litigation context, they “will not have had an opportunity to conduct discovery that may shed light on the patent's validity.”

Practice Note: While this case indicates that a patent license provision barring future validity challenges will likely be unenforceable, contract language that includes incentives to a licensee to not challenge a patent’s validity or includes an alternative dispute resolution clause, will likely still be enforceable.

Patents / Sanctions

Repeated Failures to Comply with Discovery Warrant Sanctions Against Counsel
by Clifford R. Lamar II (Dale)

Addressing sanctions awards against plaintiff and its counsel, the Federal Circuit found that plaintiff’s counsel personally violated discovery orders and that sanctions were appropriate. Rates Tech., Inc. v. Mediatrix Telecom, Inc., Case No. 11-1384 (Fed. Cir. July 26, 2012) (Bryson, J.).

RTI sued Mediatrix for infringement of two patents directed to systems for minimizing the cost of placing long-distance phone calls. Mediatrix was granted early, limited discovery of RTI’s infringement contentions. To aid RTI in preparing its contentions, Mediatrix was ordered to produce technical documents. RTI was given four opportunities to provide its infringement contention, but failed to give an adequate response. As a result of RTI’s failure, the magistrate judge filed reports and recommendations that RTI’s failure was willful, that the case should be dismissed and that attorneys’ fees should be assessed equally against RTI and its lead counsel under Fed. R. Civ. P. 37(b)(2)(C). The district court refused to hear oral arguments and adopted the magistrate judge’s recommendation in its entirety.

On appeal, RTI’s lead counsel argued that he should not be sanctioned for failing to provide information not within his possession, that the sanction violated due process, that he should not be sanctioned because he did not personally violate any discovery orders and that the district court improperly denied his request for oral arguments on the motion for sanctions. The Federal Circuit panel rejected each of these arguments.

First, the Federal Circuit noted that the magistrate judge had made a finding that Mediatrix’s production was substantial and that RTI had more than enough information to respond to the contention interrogatory. Therefore, the Court concluded that RTI’s lead counsel was not sanctioned for failing to produce information that he did not have. Second, his due process argument was rejected because the lower court found that he had sufficient information to respond to the contention interrogatory. Third, the Court rejected the argument that RTI’s lead counsel did not personally violate the discovery orders by holding that, as lead counsel, he had a duty to comply with the district court’s orders, which he failed to do. Fourth, the Court looked to regional circuit law (the U.S. Court of Appeals for the Fourth Circuit), which only requires notice and an opportunity to respond by brief or oral argument, to uphold the district court’s refusal to hear oral arguments on the sanctions motion. In fact, the Federal Circuit noted that the parties had ample opportunity to argue the sanctions issue at a hearing in 2007. Finally, the Court noted that the lead counsel’s brief on appeal contained several statements that the Court characterized as “misleading or improper,” although the Court stated that this played no role in its ultimate decision.

Patents / Attorney-Client Privilege

Federal Circuit Signals Acceptance of Fairness Balancing in Determining Scope of Privilege Waiver
by Kyle Virgien and Charles J. Hawkins

Addressing scope of waiver under U.S. Court of Appeals for the Ninth Circuit law, the U.S. Court of Appeals for the Federal Circuit vacated a lower court’s production order and contempt sanctions ruling, concluding that assessing the scope of an extra-judicial express waiver of attorney-client privilege necessarily requires consideration of fairness. Wi-LAN, Inc. v. LG Electronics, Inc., Case No. 11-1626 (Fed. Cir., July 13, 2012) (Clevenger, J.) (Reyna, J., dubitante).

The case arose from a patent dispute between Wi-LAN and LG. Wi-LAN accused LG of infringing patents directed to “V-chip” technology for ratings-based blocking of television programs. Before filing suit against LG, Wi-LAN attempted to convince LG of its infringement by forwarding a privileged letter from Wi-LAN’s outside counsel that analyzed Wi-LAN’s patent rights and concluded that LG’s products infringed. The discussions were not successful and Wi-LAN sued LG for infringement of its patents. Upon the filing of the lawsuit, LG subpoenaed Wi-LAN’s outside counsel for “documents and testimony relating to the subject matter” of the letter, i.e., Wi-LAN’s allegations of LG’s infringement of its patents.

Wi-LAN’s outside counsel, Kilpatrick Townsend & Stockton LLP, moved to quash the subpoena, arguing that, even if the disclosure of the letter had resulted in a privilege waiver, this waiver should be limited to the letter itself. This argument was based in significant part on fairness balancing, the concept that a privilege waiver should extend to undisclosed materials only when the disclosed and undisclosed materials should in fairness be considered together. The lower court concluded that a broad subject-matter waiver occurred. Wi-LAN’s outside counsel Kilpatrick refused to comply with the discovery orders, was found in contempt, and appealed the contempt finding.

The Federal Circuit vacated the lower court’s ruling, concluding that the lower court should have considered Kilpatrick’s arguments regarding the fairness of limiting the scope of the extra-judicial express waiver. Considering 9th Circuit law, the Federal Circuit found that the district court erred by not considering whether LG would be unfairly prejudiced by Wi-LAN’s assertion of privilege against discovery into attorney-client communications beyond the four corners of the letter. The Federal Circuit found that considering fairness arguments in this situation “resonates with certain trends in federal privilege law.”

The Federal Circuit also vacated the lower court’s entry of contempt sanctions against Kilpatrick but acknowledged the lower court’s discretion to revisit the issue on remand. The Federal Circuit explained that sanctions might still be appropriate, given Kilpatrick’s failure take necessary actions to avoid a contempt ruling, such as properly moving for certification of an interlocutory appeal or seeking mandamus review from the Federal Circuit when faced with an unlawful production order.

In a dubitante opinion, Judge Reyna disagreed with the majority’s willingness to divine from the precedent a trend favoring fairness balancing and concluded, “as I cannot prove or disprove our result, I go along with the majority—but with doubt.”

Practice Note: The Federal Circuit appears to have articulated, in the last sentence of the majority opinion, a policy that supports immediate appellate review of all orders compelling the disclosure of privileged materials, despite the Supreme Court’s ruling in Mohawk Industries v. Carpenter, 130 S. Ct. 599 (2000), that district court orders compelling production of privileged materials are not immediately appealable as collateral orders.

Patent / Litigation

Sanctions Award Without Fees Not Appealable
by Jeremy T. Elman

Addressing the issue of the appealability of a sanction award without a fee award, the U.S. Court of Appeals for the Federal Circuit reiterated that an order for sanctions for attorneys’ fees is not appealable absent a final judgment awarding a fee amount. Orenshteyn v. Citrix Systems, Inc., Case No. 11-1308 (Fed. Cir., July 26, 2012) (Linn, J.) (Newman, J., dissenting on motion to dismiss).

Plaintiff-appellant Alexander Orenshteyn filed a complaint against Citrix Systems alleging patent infringement. The district court granted Citrix summary judgment of invalidity on the patent infringement allegations, as well as Citrix’s motion for sanctions against Orenshteyn and his (prior) counsel. The district court did not determine a fee amount under the rationale that the appeal may affect that determination, but Orenshteyn appealed the district court’s invalidity finding, as well as its sanctions order. Citrix opposed the appeal, arguing in part that the appeal of the sanctions order was premature because there had been no final determination of the amount of the attorneys’ fees.

The Federal Circuit first explained that it had jurisdiction over an appeal of a “final” decision of a district court under 28 U.S.C. § 1295(a)(1) or of an interlocutory order as specified in 28 U.S.C. § 1292. In this case the Court concluded that while the decision on the infringement issue was final, the sanctions order fit neither of the reviewable categories; noting it was not a “final” order since the award of attorneys’ fees were not compensation for the injury giving rise to the action. The Federal Circuit said that in rare circumstances pendent jurisdiction can be exercised over non-final orders, but such circumstances did not exist here. Such circumstances only exist if the non-final, interlocutory order is intertwined with the final order or if it is necessary to review both orders together.

The Federal Circuit noted that several circuits declined to exercise jurisdiction over unquantified attorneys’ fees when appealed with final decisions. The Federal Circuit also noted that the Supreme Court, in Swint v. Chambers County Comm’n. (1995), similarly limited pendent jurisdiction for two reasons—first, Congress specifically provided district courts the authority to certify an interlocutory order as appealable under 28 U.S.C. § 1292(b), and second, the Supreme Court has express rulemaking authority to expand the list of appealable interlocutory orders. The Court did note that there were rare and limited occasions in which an appellate court considered attorneys’ fees issues along with a final order. Here, the orders were not intertwined because invalidity has different legal basis and requires a different legal analysis than attorneys’ fees. The Court noted that Swint is widely considered to have thrown “cold water on pendent appellate jurisdiction” and noted that subsequent cases are typically consistent with Swint.

Lastly, the Federal Circuit noted that even if it were proper to use pendent jurisdiction, such an exercise would still be discretionary by the Federal Circuit, and the Court would decline to exercise such jurisdiction in this case. It would be inefficient for this Court to review a non-final sanctions order when it may be adjudicated separately from the merits and thus may be moot.

Judge Newman dissented, claiming that it would be judicially efficient and practical to resolve both orders at the same time since the invalidity order and attorneys’ fees order arose from the same factual and legal considerations.

Practice Note: Non-final sanctions orders for attorney’s fees are not appealable until there is a final order containing the fee amount, even if there is a final judgment on the merits of the case that is already appealable. On a related aspect of appellate jurisdiction, refer to the note in this issue of IP Update regarding Robert Bosch LLC v. Pylon Mfg. Corp.

Patents / Interference—Priority Benefit Under § 120

An “Application” Under § 135(b)(2) Includes Earlier Effective Filings Under § 120
by Sungyong “David” In

Addressing a decision by the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences (the Board) in an interference proceeding, the U.S. Court of Appeals for the Federal Circuit affirmed that the phrase “an application filed” in 35 U.S.C. § 135(b)(2) included applications afforded the benefit of an earlier priority date under 35 U.S.C. § 120. Loughlin v. Ling, Case No. 11-1432 (Fed. Cir., July 11, 2012) (Lourie, J.).

The case arose from an interference proceeding under § 135(a) between a claim of a patent to Loughlin and a claim to an application for a patent by Ling. Both the Loughlin patent and Ling application are directed to a multi-function lock. The Loughlin patent resulted from an application filed on May 13, 2004 and published on November 18, 2004. The Ling application, which was filed on February 5, 2007, was granted the benefit of an earlier priority date under § 120 from an earlier filed application filed on January 16, 2004.

Ling copied certain claims of Loughlin’s published application, in order to provoke the interference.

Loughlin moved for judgment under § 135(b)(2), asserting that Ling was barred from provoking an interference because Ling’s application was filed more than one year after the publication date of the application that resulted in the Loughlin patent. The Board denied Loughlin’s motion, holding that since under § 120, Ling’s application had an effective filing date of January 16, 2004, Ling’s application is not an application filed after the publication date of the Loughlin application. After the Board cancelled the interference claim of Loughlin’s patent, Loughlin appealed.

On appeal, the Federal Circuit affirmed the Board’s decision. The Court held that the Board correctly interpreted § 135(b)(2) in view of the plain language of the statue. The Court determined that, under § 120, Ling’s application was entitled to the benefit of the priority date of the earlier application, and thus Ling was entitled to the earlier date in overcoming the bar set forth in § 135(b)(2). The Court further noted that the Board consistently interpreted “an application filed” in § 135(b)(2) as including the priority benefit of § 120.

Patents / Hatch-Waxman Act

District Court Power to Enjoin Improper Use Code Is Limited
by William (Bill) Gaede

Addressing for the first time the role of a district court to remedy an improper use code submitted to the U.S. Food and Drug Administration (FDA), the U.S. Court of Appeals for the Federal Circuit held that a federal court’s powers are limited to enjoining an improper use code and that the party is “given the opportunity to propose the specific language of the use code.” Novo Nordisk A/S et al. v. Caraco Pharmaceutical Laboratories, et. al., Case No. 10-1001 (Fed. Cir., July 30, 2012) (Rader, C.J.) (Dyk, J., concurring-in-part and dissenting in part). The decision was rendered on remand following the Supreme Court’s decision in Caraco Pharmaceutical Laboratories v. Novo Nordisk. (See IP Update, Vol. 15, No. 5.)

By way of background, the Supreme Court’s Caraco decision held that generic drug manufacturers have the right to counterclaim against a branded company to force a correction of a “use code” provided to the FDA. Use codes are submitted by the brand company to describe the scope of method claims for patents listed in the Orange Book. The FDA relies on such use codes to assess whether the generic’s proposed label would overlap with the method claims of the listed Orange Book patents.

On remand to the Federal Circuit, the Court assessed whether Novo’s current use code was correct and whether the district court erred in issuing a mandatory injunction requiring Novo to reinstate its prior use code. On the first question, the Court held that Novo’s current use code inaccurately described Novo’s patent as covering two FDA-approved methods that the patent in question admittedly did not cover.

Having so determined, the Court then examined whether the district court erred by mandating Novo to resubmit the use code and to include specific language in the prior use code to describe a specific claim of one of the patents at issue. The Federal Circuit held that the district court properly ordered Novo to correct the use code listing for the patent in question. However, the Federal Circuit held that the district court abused its discretion “in dictating the precise terms of the use code to be submitted” to the FDA. As the Court explained, it is the branded company that is “given the opportunity to propose the specific language of the use code” within the parameters of the patent’s scope as defined by the court. If the revised use code is overbroad, the district court has the power to correct the error.

Patents / Jurisdiction

Federal Circuit to Hear En Banc Issue of Jurisdiction Over Determinations of Liability Where Damages and Willfulness Issues Not Yet Addressed
by Charles J. Hawkins

In a sua sponte order, the U.S. Court of Appeals for the Federal Circuit granted a hearing en banc to address the issue of whether the Court has jurisdiction under 28 U.S.C. § 1292(c)(2) over patent infringement liability determinations where bifurcated issues of damages and/or willfulness have not yet been addressed. Robert Bosch LLC v. Pylon Mfg. Corp., Case Nos. 11-1363; -1364 (Fed. Cir. August 7, 2012).

The Court requested that the parties file en banc briefs limited to the following questions:

Does 28 USC § 1292(c)(2) confer jurisdiction on this Court to entertain appeals from patent infringement liability determinations when a trial on damages has not yet occurred?
Does 28 USC § 1292(c)(2) confer jurisdiction on this Court to entertain appeals from patent infringement liability determinations when willfulness issues are outstanding and remain undecided?

Patents / America Invents Act

USPTO Releases Proposed Rules for Implementation of AIA
by Bernard P. Codd

The U.S. Patent and Trademark Office (USPTO) recently released proposed rules for implementing the First Inventor to File provisions of the America Invents Act (AIA). The new rules take effect on March 16, 2013.

According to the proposed rules, a claim for priority and a certified copy of the foreign application must be filed in an application, other than a design application, within the later of four months from the actual filing date of the application or 16 months from the filing date of the prior foreign application, and the claim for priority must be presented in the application data sheet. If an application is a national phase application, the claim for priority must be made and a certified copy of the foreign application filed within the time limit set forth in the Patent Cooperation Treaty (PCT). If a nonprovisional application filed on or after March 16, 2013 claims the benefit of the filing date of a foreign application filed prior to March 16, 2013, and also contains, or contained at any time, a claim to an invention that has an effective filing date on or after March 16, 2013, the applicant must provide a statement to that effect within the later of four months from the actual filing date of the application, four months from the date of entry into the national stage, 16 months from the filing date of the prior foreign application, or the date that a first claim to a claimed invention that has an effective filing date on or after March 16, 2013, is presented in the application. If a nonprovisional application filed on or after March 16, 2013, claims the benefit of the filing date of a foreign application filed prior to March 16, 2013, does not contain a claim to an invention that has an effective filing date on or after March 16, 2013, but discloses subject matter not also disclosed in the foreign application, the applicant must provide a statement to that effect within the later of four months from the actual filing date of the later-filed application, four months from the date of entry into the national stage, or 16 months from the filing date of the prior foreign application. The applicant does not have to identify how many or which claims in the nonprovisional application have an effective filing date on or after March 16, 2013. If an applicant fails to timely provide such a statement and then later indicates that the nonprovisional application contains a claim having an effective filing date on or after March 16, 2013, or subject matter not also disclosed in the foreign application, the USPTO may issue a requirement for information requiring the applicant to identify where there is written description support in the foreign application for the remaining claims in the nonprovisional application.

The proposed rules would also require that in order to claim the benefit of a prior-filed provisional application, a provisional application must disclose the invention claimed in at least one claim of the later-filed application in the manner provided by 35 U.S.C. § 112(a). If a nonprovisional application claims the benefit of the filing date of a provisional application filed prior to March 16, 2013, and also contains, or at any time contained, a claim to a claimed invention that has an effective filing date on or after March 16, 2013, the applicant would be required to provide a statement to that effect within the later of four months from the actual filing date of the later-filed application, four months from the date of entry into the national stage, 16 months from the filing date of the prior filed provisional application, or the date that a first claim to an invention that has an effective filing date on or after March 16, 2013, is presented in the application. Further, if a nonprovisional application filed on or after March 16, 2013, claims the benefit of the filing date of a provisional application filed prior to March 16, 2013, does not contain a claim to a claimed invention that has an effective filing date on or after March 16, 2013, but discloses subject matter not also disclosed in the provisional application, the applicant must provide a statement to that effect within the later of four months from the actual filing date of the later-filed application, four months from the date of entry into the national stage, or 16 months from the filing date of filing of date of the later-filed application.

As proposed in the rules, if an applicant fails to timely provide such a statement and then later indicates that the nonprovisional application contains a claim having an effective filing date on or after March 16, 2013, or subject matter not also disclosed in the provisional application, the USPTO may issue a requirement for information requiring the applicant to identify where (by page and line or paragraph number) there is written description support.

Furthermore, the proposed rules require that no cross-references to any application(s) for which no priority benefit is claimed may be included in an application data sheet. In addition, the proposed rules provide that subject matter that qualifies as prior art under 35 U.S.C. § 102(a)(2) will be treated as commonly owned with the claimed invention for purposes of 35 U.S.C. § 102(b)(2)(C) if the applicant provides a statement that the prior art and the claimed invention were owned by the same person or subject to an obligation of assignment to the same person. This provision is analogous to the present removal of prior art references under 35 U.S.C. § 103(c), but to disqualify anticipatory references.

The proposed rules would further define the effective filing date of a claim in a patent application, other than in a reissue application, as the earliest of the actual filing date of the patent or the application for the patent containing a claim to the invention; or the filing date of the earliest application for which the patent or application is entitled, as to such invention, to priority to or the benefit of an earlier filing date under 35 U.S.C. 119, 120, 121 or 365.

The proposed rules also contain provisions for filing an affidavit or declaration under 37 C.F.R. § 1.130 to traverse rejections based on public disclosures of the claimed subject matter by a party who obtained the subject matter from the inventor, or by showing an earlier public disclosure of the subject matter on which the rejection is based by the inventor. Affidavits and declarations under Rule 1.130 would not available if the rejection is based upon a disclosure made more than one year before the effective filing date of the claimed invention.

The deadline for submitting written comments on the proposed rules is October 15, 2012. The USPTO requests comments be sent via email to fitf_rules@uspto.gov.

Third Party Prior Art Submissions

The USPTO also recently published final rules for Preissuance Submissions by Third Parties, which are effective September 16, 2012. Third parties can submit prior art for consideration by the USPTO by payment of a required fee if the prior art is submitted before the earlier of the date of a mailing of a Notice of Allowance or the later of six months after the date on which the application is published or the date of a first rejection. In accordance with 37 C.F.R. § 1.290, a Preissuance Submission must contain a list identifying the items being submitted, a concise description of the relevance of each item submitted, a legible copy of each non-US patent document submitted, an English translation of any non-English language item listed, a statement by the party making the submission that the submission complies with the statute and the rule. The fee for a Preissuance Submission is $180 for each 10 references or fraction thereof. There is an exemption to the fee if the Preissuance Submission is the first submission of the third party or a party in privity with the third party in a given application, and no more than three references are cited.

Statute of Limitations Provisions for Disciplinary Proceedings

Finally, the USPTO also recently released the final rules for the Implementation of Statute of Limitations Provisions for Office Disciplinary Proceedings. The USPTO adopted three rules to administer the new procedure: a disciplinary complaint shall be filed within one year after the date on which the Office of Enrollment and Discipline (OED) Director receives a grievance forming the basis of a complaint, and in no event more than 10 years after the date on which the misconduct forming the basis of the proceeding occurred; a grievance is defined as a written submission from any source received by the OED director that presents possible grounds for discipline of a specified practitioner; and the one-year period for filing a complaint may be tolled by written agreement. In order to satisfy the definition of a grievance, the submission must identify the practitioner alleged to have engaged in misconduct and present information or evidence sufficient to enable the OED director to determine whether possible grounds for discipline exist. A practitioner can agree in writing to a tolling of the one-year period for filing a complaint to provide both the USPTO and the practitioner with additional time to resolve matters without filing a complaint.

Patents / International Trade Commission

ITC Proposes Rule Changes to Section 337 Practice
by Christopher G. Paulraj

On July 2, 2012, the International Trade Commission (ITC) published a notice of proposed rulemaking in which it proposed to amend its Rules of Practice and Procedure in order to clarify and harmonize certain provisions and to address concerns that have arisen in ITC practice. 77 Fed. Reg. 41120-41132 (July 12, 2012). These rule changes were proposed in accordance the ITC’s “Plan for Retrospective Analysis of Existing Rules,” which established a process under which the ITC conducts a periodic review in order to determine whether any significant regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving regulatory objectives. The proposal includes changes to ITC procedure with respect to the initiation and conduct of Section 337 investigations, including rules of general applicability, as well as specific rules concerning pleadings, motions, discovery, initial determinations, petitions for review, temporary relief proceedings and enforcement proceedings. Highlighted below are some of the more significant proposed rule changes.

Changes to Pleading Requirements

The proposed rule changes include certain modifications to the pleading requirements for complaints filed with the ITC. In particular, the ITC proposes requiring the complainant to plead domestic industry allegations in the complaint with more particularity by providing a “detailed” description of the alleged domestic industry that exists or is in the process of being established. Additionally, the ITC has proposed a rule that would require the complainant to specify in the complaint whether it is requesting relief in the form of a general exclusion order, a limited exclusion order, and/or a cease and desist order. Furthermore, the ITC has proposed requiring the complainant to identify the accused products with a clear statement in “plain English” in order to put the public on notice of the specific types of products involved.

Changes to Process for Institution and Consolidation of Investigations

The ITC has also proposed to formalize the process for consolidation of Section 337 investigations, which would allow administrative law judges (ALJ) the discretion to consolidate investigations, if both investigations are before the same ALJ, and would allow the chief ALJ to consolidate investigations if the investigations are before different ALJs and both ALJs agree that consolidation is appropriate. In addition, the ITC has proposed a rule change that would allow the Commission to restart the normal 30-day period for determining whether to institute an investigation if the complainant makes substantial amendments to the complaint, such as naming additional proposed respondents or making additional infringement allegations, prior to institution.

Limitations on Discovery

The ITC has also proposed certain limitations on discovery in its notice of proposed rulemaking. Particularly, in accordance with the Federal Rules of Civil Procedure, the proposed rule changes would limit complainants as a group to a maximum of five fact depositions per respondent, or no more than 20 fact depositions, whichever is greater, and respondents as a group to a maximum of 20 fact depositions total. If the Commission investigative attorney is a party, he or she may take a maximum of 10 fact depositions and is permitted to participate in all depositions taken by any parties in the investigation. In addition, the ITC has proposed to limit the number of interrogatories that may be served by each party to a maximum of 175, which is consistent with the ground rules of several of the ALJs.

Practice Note: The ITC has requested that any written comments concerning these proposed rule changes be submitted by September 10, 2012.

Patents / Supplementary Protection Certificates (Pharmaceuticals)

Increased European Patent Protection Following a Landmark Ruling on Supplementary Protection Certificates
by Désirée Fields and Keo Shaw

The Court of Justice of the European Union (CJEU) rendered judgment relating to a preliminary reference from the English Court of Appeal, holding that the existence of an earlier marketing authorization (MA) of a pharmaceutical product does not preclude the grant of a Supplementary Protection Certificate (SPC) for a different application of the same product. Neurim Pharmaceuticals (1991) Ltd v Comptroller-General of Patents (CJEU, C-130/11, July 19, 2012).

Background

The SPC system exists to provide protection to pharmaceutical products past the expiry of their related patents, generally for a maximum period of five years. This is designed to compensate drug developers for delays between innovation and commercial exploitation caused by the complexity of obtaining the necessary authorizations. A SPC confers the same rights as a patent limited to the product authorized by the relevant MA.

The Supplementary Protection Certificate Regulation provides that in order to obtain a SPC, the MA must be the first authorization to place the product on the market as a medicinal product. The SPC Regulation defines “medicinal product” as any substance or combination of substances for treating or preventing disease and defines a “product” as the active ingredient or combination of active ingredients of a medicinal product.

Neurim discovered that certain formulations of melatonin could be used as a treatment for insomnia. Neurim applied for, and was granted, a patent for such formulations, but it took Neurim more than 15 years from filing its patent to being granted a MA. Neurim accordingly applied for a SPC to obtain additional protection beyond the life of the patent based on its June 2007 MA.

The UK Intellectual Property Office (IPO) refused to grant the SPC on the basis that Neurim’s MA was not the first MA for melatonin. The IPO identified an earlier MA for a different melatonin treatment sold under the trademark REGULIN. REGULIN was used in sheep to regulate seasonal breeding activity and was the subject of a different patent from Neurim’s insomnia treatment. Neurim referred the matter to the English courts, but the IPO’s refusal was upheld. Neurim appealed to the Court of Appeal, which decided to make a reference to the CJEU concerning the interpretation of the SPC Regulation.

Decision

Central to the CJEU’s reasoning was a recognition that a fundamental objective of the SPC Regulation was to ensure sufficient protection to cover the investment put into product development to encourage pharmaceutical research. The CJEU ruled that the mere existence of an earlier MA obtained for a medicinal product (for veterinary or human use) did not preclude the grant of a SPC for a different application of the same product for which a MA has been granted, provided that the application was within the limits of the protection conferred by the patent relied upon for the purposes of the application for the SPC. Only the first MA of the medicinal product, comprising the product and authorized for a therapeutic use corresponding to that protected by the patent relied upon for the SPC, should be considered to be the first MA of that product as a medicinal product exploiting that new use within the meaning of the SPC Regulation.

Practice Note: This decision continues the teleological, rather than literal, approach to the interpretation of the SPC Regulation adopted by the CJEU in other recent SPC decisions. It is a practical ruling that reduces the barriers to obtaining SPCs for applicants. There is the potential for the same arguments to be applied to obtain SPC protection for other categories of products, such as inventive formulations of known products for known uses. It will be interesting to see the extent to which this decision paves the way for SPC protection beyond secondary medical use products.

Trademarks

Two Circuits Conclude that Automatic Bankruptcy Stay Does Not Prevent Continuation of an Infringement Action of Trademarks
by Ulrika E. Mattsson

In the first decision, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court decision, concluding that a defendant’s bankruptcy filing does not prevent the district court from ruling on a contempt motion for violation of a temporary restraining order protecting plaintiff’s trademarks. Dominic’s Restaurant of Dayton, Inc. v. Mantia, Case Nos. 10-3376; -3377 (6th Circuit July 5, 2012) (Batchelder, C.J.; McKeague, J.; Quist, D.J., sitting by designation).

The defendants owned a restaurant not affiliated with Dominic’s but used the plaintiffs’ trademarks in connection with its restaurant services. Dominic’s brought an infringement action claiming that the defendants used its trademarks in its operation and promotion of its restaurant services and subsequently obtained numerous injunctions, as well as contempt citations for violations of those injunctions.

During the course of this litigation, one of the defendants filed for bankruptcy and argued that the automatic stay prevented continuation of the infringement action against him. The district court disagreed and held that the automatic bankruptcy stay does not apply to the defendant’s infringing use of plaintiff’s trademarks. The district court explained that while the bankruptcy stay effectively stays the assessment of damages, it does not bar injunctive relief against the defendant. Mantia appealed.

The 6th Circuit affirmed, concluding that while the bankruptcy code stays judicial proceedings that were commenced against the debtor prior to a bankruptcy action, it does not apply to infringing use of trademarks and service marks. Were it obvious, application of automatic stay would permit the defendant to continue to commit trademark and service mark infringement, and the bankruptcy laws should not protect that.

In the second case, the U.S. Court of Appeals for the Seventh Circuit held that a trademark licensee can continue using licensed trademarks even after the license is rejected in bankruptcy. Sunbeam Products Inc. v. Chicago American Mfg. LLC, Case No. 11-3920 (7th Cir., July 3, 2011) (Easterbrook, C.J.).

Chicago American, a manufacturing company, licensed (from an entity known as Lakewood Engineering and Mfg.) the right to produce branded fans. Lakewood was in financial distress, and, three months into the contract, several of its creditors filed an involuntary bankruptcy petition against it. The appointed trustee rejected the license and sold the Lakewood assets to a third party, Sunbeam, which sued to stop the licensee from continuing to produce the branded fans and use Lakewood’s trademarks.

The 7th Circuit held that Chicago American was entitled to continue using the trademarks, even though the license had been rejected, explaining that since a licensor’s simple breach outside of bankruptcy typically would not cause the licensee to lose the use of the licensed property under non-bankruptcy law, there is no reason why the non-debtor licensee should lose that right in a licensor bankruptcy. Sunbeam appealed.

On appeal, the 7th Circuit rejected the rule of Lubrizol Enterprises v. Richmond Metal Finishers, (4th Cir., 1985) which holds that when an intellectual property license is rejected in bankruptcy, the licensee loses the ability to use licensed copyrights, trademarks and patents. The court noted that no other circuit has adopted the Lubrizol rule and explained, as the rationale for its decision, that bankruptcy law is only designed to eliminate certain rights under some contracts. Here the trustee used § 365 (a) to reject the contract—the equivalent of a breach that ended the debtor's obligations but did not affect the rights of the licensee.

Practice Note: The 7th Circuit’s decision means that trademark licensees are not subject to losing their rights just because the licensor files for bankruptcy and the license is rejected by the trustee. This decision will budget intellectual property licensees against loss of license rights when the licensor is in bankruptcy proceedings.

Trademarks / Likelihood of Confusion

Confusing Similarity Goes to the Dogs
by Elisabeth (Bess) Malis

In an appeal from the U.S. Patent and Trademark Office Trademark Trial and Appeal Board (TTAB), the U.S. Court of Appeals for the Federal Circuit affirmed the TTAB’s decision to deny federal registration of the trademark WAGGIN’ STRIPS based on a likelihood of confusion with a pre-existing registration for the mark BEGGIN’ STRIPS. Midwestern Pet Foods v. Societe Des Produits Nestle, Case No. 11-1482 (Fed. Cir., July 9, 2012) (Bryson, J.) (Dyk, J., concurring-in-part and dissenting-in-part).

Nestle adopted the mark BEGGIN’ STRIPS for pet treats in 1988. The mark was registered with the U.S. Patent and Trademark Office (USPTO) in 1989. In November 2003, appellant Midwestern Pet Foods, Inc. (Midwestern) filed an intent to use application for the mark WAGGIN’ STRIPS for pet food and edible pet treats. Nestle opposed the application before the TTAB arguing, in part, likelihood of confusion between the marks. The TTAB upheld Nestle’s claim of likelihood of confusion principally based on similarity of the marks, identical goods, and similar channels of trade and purchasers. Midwestern appealed.

The Federal Circuit held that the TTAB’s finding of a likelihood of confusion between the marks was supported by substantial evidence. The marks were used in connection with identical goods, pet food, which are inexpensive items catering to ordinary consumers who would exercise no more than ordinary care when selecting a product. The Court also supported the TTAB’s finding that the marks contained similarities in format, structure and syntax; the marks both share the term “STRIPS” and the first words “beg” and “wag” both convey behavior exhibited by dogs in connection with food. Finally, Nestle offered substantial evidence of national sales and advertising that demonstrated the mark engendered a “high degree of recognition,” (though falling short of “fame”) and was entitled to a broad level of protection. Although Nestle did not introduce consumer survey evidence in support of likelihood of confusion, the Court held that such evidence was not required. The Federal Circuit went on to affirm the TTAB holding that the WAGGIN’ STRIPS mark was confusingly similar to Nestle’s mark BEGGIN’ STRIPS.

Concurring in part and dissenting in part, Circuit Judge Dyk agreed with the majority’s holding regarding the likelihood of confusion issue, but disagreed that Nestle was not obligated under federal discovery rules to disclose in discovery the evidence it introduced at trial.

Copyrights / Bankruptcy

Copyright Owners Waive Right to Jury Trial by Filing Claims in Bankruptcy Court
by Rita J. Yoon

By seeking non-dischargeability in bankruptcy of damages owed by a copyright infringer, the U.S. Court of Appeals for the Eighth Circuit held that copyright owners submitted to the bankruptcy court’s equitable power and waived their Seventh Amendment right to a jury trial on their damages claims. Pearson Education, Inc. et al. v. Joel Thomas Almgren, Case No. 11-2723 (8th Cir., July 13, 2012) (Gruender, J.).

Almgren sold unlicensed copies of solution manuals for textbooks published by Pearson Education, Cengage Learning and The McGraw-Hill Companies on the internet. Without sending a cease and desist letter, the publishers sued Almgren for copyright infringement. Almgren subsequently filed for Chapter 7 bankruptcy. The publishers sought non-dischargeability in the bankruptcy court of any copyright damages owed by Almgren. The publishers also made a jury demand and sought $90,000 in attorneys’ fees.

The bankruptcy court struck the publishers’ jury demand and denied their motion for attorneys’ fees. The bankruptcy court found that Almgren willfully infringed, but only awarded the statutory minimum of $14,250 in damages that were not dischargeable in bankruptcy. The publishers appealed to the district court, which affirmed.

On appeal to the 8th Circuit, the court held that the bankruptcy court did not err in striking the publishers’ jury demand on the amount of statutory damages. By filing a claim against Almgren’s bankruptcy estate, the publishers submitted to the bankruptcy court’s equitable power. Incidental questions that arise in the course of administering the bankrupt estate, including facts that ordinarily would be triable by a jury, fall within the bankruptcy court’s equitable power over restructuring of the debtor-creditor relationship. The publishers thus waived their right to a jury’s determination of the amount of damages when they filed their non-dischargeability claim against Almgren in bankruptcy court.

The 8th Circuit also affirmed the bankruptcy court’s denial of attorneys’ fees because the publishers could have avoided litigation by way of a cease and desist letter. While copyright owners are “free to make an example of a defendant by litigating their claims against him fully” and “are under no obligation to employ a minimum-impact cease-and-desist strategy,” they “are never guaranteed that the attorneys’ fees generated by their strategy of choice will be compensated.” The 8th Circuit concluded that the determination of attorneys’ fees falls within the broad discretion of the bankruptcy court.

Copyrights / Statutory Interpretation

Statutory Provision on Royalty Judges Violates Appointments Clause
by Alesha M. Dominique

The U.S. Court of Appeals for the District of Columbia Circuit ruled that the position of Copyright Royalty Judges (CRJs) violates the Appointments Clause of the U.S. Constitution, but remedied the violation by invalidating and severing restrictions on the Librarian of Congress’s ability to remove the CRJs. Intercollegiate Broadcasting System Inc. v. Copyright Royalty Board, Case No. 11-1083 (D.C. Cir., July 6, 2012) (Williams, J.).

Intercollegiate Broadcasting System Inc. (Intercollegiate) is an association of noncommercial webcasters that transmit digitally recorded music over the internet to high school and college campuses. Such webcasting constitutes a digital performance under the Copyright Act and therefore entitles the owner of a song’s copyright to royalty payments. The Copyright Act, 17 U.S.C. §§112 and 114, provides a statutory license for webcasting which allows CRJs to establish reasonable licensing terms if the parties cannot themselves agree to licensing terms. Intercollegiate appealed the final determination of the CRJs that set forth royalty rates and terms applicable to internet-based webcasting of digitally recorded music.

Intercollegiate argued that, as structured, the Copyright Royalty Board violates the Appointments Clause, Art. II, §2, cl. 2, on two grounds: that the CRJs exercise of significant ratemaking authority without any effective means of control, such as unrestricted removability, qualified them as “principal” officers who must be appointed by the President with Senate confirmation; and that even if the CRJs were “inferior” officers, the Librarian of Congress is not a “Head of Department” in whom Congress may vest appointment power.

As to rulemaking authority, the Court agreed that the CRJs significant ratemaking authority coupled with the Librarian of Congress’s restricted ability to remove the CRJs, qualified them as principal officers. Specifically, the Court found that the CRJs exercised significant authority given that their ratemaking decisions have considerable consequences, as the CRJs set the terms of exchange for not only traditional media such as CDs, cassettes and vinyl, but also on digital music downloaded through iTunes and Amazon.com. The Court reasoned that such rates can mean life or death for firms and industries.

The Court further found that the fact that the CRJs could be removed by the Librarian only for misconduct or neglect of duty, further supported the finding the CRJs are principal officers. To correct the violation, the Court invalidated and severed the restrictions on the Librarian’s ability to remove the CRJs. With unfettered removal power, the Court was confident that the CRJs would be inferior, rather than principal, officers.

As to Intercollegiate’s “Head of Department” argument, the Court disagreed. The Court explained that the Librarian is a Head of Department because, among other reasons, the powers of the Library and the Board to promulgate copyright regulations, to apply statutes to affected parties, and to set rates and terms case by case are ones generally associated with executive agencies, and in such a role the Library is undoubtedly a component of the executive branch.

Rights of Publicity / Implied Consent

Walking the Red Carpet May Negate Rights of Publicity Claims
by Sarah Bro

In an unpublished, non-precedential opinion, the U.S. Court of Appeals for the Ninth Circuit concluded that a display of sample images for which a company provides copyright licenses to end users did not violate a celebrity’s rights of publicity when the celebrity gave implied consent to have her photograph taken on the “red carpets” of various events. Shirley Jones v. Corbis Corporation, Case No. 11-56082 (9th Cir., July 16, 2012 (Fletcher, J.; Wardlew, J.; Bybee, J.).

Corbis maintains an online library of digital images and sells sublicenses for the images on behalf of the original copyright owners, such as photographers and news wire services. Corbis’ image library is searchable by keywords, and it displays low-resolution sample images of the copyrighted photographs that match applicable keywords.

Shirley Jones, the star of the Partridge Family television series, filed a class action complaint against Corbis alleging that its display of sample images associated with her name violated her common law and statutory rights of publicity. Specifically, Jones claimed that Corbis appropriated her image to its advantage to sell its product, namely, copyright licenses for the images of Jones and other “California residents” named in the class action complaint.

The district court explained that, under California law, to sustain a common law or statutory action for commercial misappropriation, a plaintiff must prove that the defendant appropriated his or her likeness without consent. Jones argued that she did not consent to Corbis’ use of the sample images to solicit sales of licenses for the copyrighted images. In granting Corbis’ summary judgment motion, the district court focused on the fact that Jones did not dispute that she consented to having photographers at red carpet events photograph her likeness and distribute the images, and that such practices are the custom in the entertainment industry. Jones appealed.

On appeal, the 9th Circuit affirmed the district court’s ruling that consent is determined from a plaintiff’s manifested action or inaction, and not her subjective belief as to her consent. Accordingly, Jones’ implied consent when appearing at red carpet events where she was knowingly photographed allowed for the use and distribution of her likeness.

Practice Note: Although this decision likely will be helpful to image defendants in rights of publicity actions, it may not have the same impact on similar actions involving paparazzi photographs or where images used to promote products or services and which are taken or used without the consent of the image subject.

Trade Secrets / Summary Judgment

Let the Jury Decide Trade Secret Misappropriation Claim
by Adam Auchter Allgood

The U.S. Court of Appeals for the Federal Circuit, in reinstating trade misappropriation claims regarding infrared imaging technology, concluded that, in granting summary judgment and dismissing the trade secret misappropriation claims as time-barred, the district court erred by improperly resolving issues of material fact and drawing inferences in favor of the moving party. Raytheon v. Indigo Sys., Case Nos. 11-1245; -1246 (Fed. Cir., Aug. 1, 2012) (Linn, J.).

Indigo Systems, an infrared imaging technology company founded in 1996 by three prior Raytheon employees, had a consulting services agreement with defense contractor Raytheon that terminated in 2000. In 1997, Raytheon became concerned that Indigo was poaching Raytheon personnel in order to gain access to Raytheon trade secrets. In order to address this concern, the companies entered into an agreement whereby Indigo agreed to prohibit future employees from using any intellectual property obtained from former employers.

In March 2004 Raytheon acquired an Indigo infrared camera which it disassembled in August 2004 and found possible evidence of patent infringement and trade secret misappropriation. In February 2007, Raytheon found a correlation between the areas of expertise of its former employees now working at Indigo and Indigo’s intervening technological advancements. In March 2007, Raytheon sued Indigo in federal district court in Texas alleging that Indigo was able to win contracts over Raytheon and other competitors based on stolen trade secrets and Raytheon’s patented technology.

Indigo filed for summary judgment asserting that Raytheon’s trade secret misappropriation claims were outside the three-year statute of limitations under both Texas and California law. Raytheon responded the statute of limitations was tolled either through fraudulent concealment or, under the discovery rule, until Raytheon either knew or should have known of the misappropriation. The district court agreed with Indigo and granted summary judgment finding that “Raytheon ha[d] developed an acute suspicion before March 2004 that Indigo was infringing its intellectual property rights.” The parties subsequently settled the patent infringement claim, and Raytheon appealed the dismissal of its trade secret misappropriation claim.

On appeal, the Federal Circuit, applying the law of the Fifth Circuit, reviewed the trade secret misappropriation claims de novo. It first determined that there was no meaningful difference between Texas and California law with respect to the length of the statute of limitations or the tolling of that statute. It also recognized that whether or not the discovery rule applies is a question of fact in both states. The Court then noted that the only way that Raytheon could have discovered the misappropriation was by disassembling Indigo’s camera. Therefore, the district court would have needed to find that Raytheon should have acquired and disassembled the camera prior to March 2004. However, the district court could not reach that conclusion without resolving factual questions against the non-moving party Raytheon at summary judgment.

Raytheon asserted that they bought the Indigo camera as part of their routine practice of examining competitive products, not out of any suspicion, and supported that position with testimony. The Federal Circuit concluded that this evidence, along with the fact that the camera was not disassembled until August, led to a reasonable inference in Raytheon’s favor. In both California and Texas, on motion for summary judgment, the burden is on the defendant to negate the discovery rule by proving as a matter of law that no issue of material fact exists concerning when the plaintiff discovered or should have discovered its cause of action.

The district court also stated that, as a matter of law, Raytheon was on permanent inquiry notice since 2000 and had a constant duty to investigate all acts of competition by Indigo given its prior suspicions and the migration of former employees. The Federal Circuit disagreed and concluded that this determination was improper in the face of competent summary judgment evidence to the contrary.

Since the issue of whether the discovery rule applies is a question of fact, the Federal Circuit stated that it was for the jury to decide when Raytheon should have discovered the facts supporting its trade secret misappropriation claim.

Trade Secrets / CFAA

"Authorization" Under the Computer Fraud and Abuse Act
by Rose Whelan

Considering for the first time the scope of the Computer Fraud and Abuse Act (CFAA), with respect to employees obtaining and using confidential and proprietary information from their employers’ computer systems for their own gain, the U.S. Court of Appeals for the Fourth Circuit adopted a narrow reading of the “authorization” language used in the statute as going to use, not access. WEC Carolina Energy Solutions v. Miller, Case No. 11-1201 (4th Cir., July 26, 2012) (Floyd, J.).

WEC alleges that before resigning from his position at WEC Carolina Energy Solutions (WEC), Mike Miller and his assistant Emily Kelley downloaded WEC’s proprietary information to a personal computer and emailed proprietary information to Miller’s personal email address. WEC claims that Miller later used that information in a presentation to a potential WEC customer on behalf of a WEC’s competitor, Arc Energy Services (Arc). That customer ultimately chose Arc and WEC brought suit alleging a variety of state law claims and a violation of the CFAA.

Congress initially enacted the CFAA to combat hacking. The statute imposes both criminal and civil liability on a person who, among other things, accesses a computer without authorization or exceeds authorized access. Specifically, WEC contended that Miller and Kelley violated the CFAA because under WECs policies they were not permitted to download confidential and proprietary information to a personal computer. WEC alleged that by doing so Miller and Kelley breached their fiduciary duties to WEC and either lost all authorization to access the confidential information or exceeded their authorization. The district court dismissed WEC’s CFAA allegations for failure to state a claim. WEC appealed.

Before providing its own analysis, the 4th Circuit reviewed a circuit split on the issue between the U.S Court of Appeals for the Seventh Circuit and the U.S. Court of Appeals for the Ninth Circuit. The 7th Circuit has previously based liability under the CFAA based on a theory that when an employee accesses information on a computer to further interests that are adverse to his employer, he violates his duty of loyalty, thereby terminating his agency relationship and losing any authority he has to access the computer. In contrast the 9th Circuit interprets “without authorization” and “exceeds authorized access” literally and narrowly, limiting the terms application to situations in which an individual accesses information on a computer without permission.

The 4th Circuit rejected the 7th Circuit’s analysis and adopted an interpretation similar to that of the 9th Circuit. The 4th Circuit first noted that when interpreting statutes, such as the CFAA, which involve both criminal and civil liability, the rule of lenity requires strict construction of such statues to avoid interpretations not clearly warranted by the text.

The 4th Circuit went on to determine the proper meaning of “without authorization” and “exceeds authorized access” and held that neither definition extends to improper use of information validity accessed. The court opined that such an interpretation would impose liability far beyond what Congress intended. For example, employees who violated company policy against downloading company materials so that they could work at home would be vulnerable to criminal and civil liability.

The court also rejected any interpretation that grounds CFAA liability on a cessation-of-agency theory. The court held that this rule would also extend liability beyond what Congress intended, potentially imposing criminal sanctions under this theory on employees who merely checked the latest Facebook posting or sporting events scores.

Based on these holdings, the 4th Circuit affirmed the district court’s dismissal of WEC’s CFAA claim, because defendants’ access to confidential information was authorized and only their use of the confidential information, which is not proscribed by the statute, was contrary to WEC’s authorization.

Trade Secrets

Trade Secret Misappropriations Accusations Are Not Proof of a Habit
by Brett Bachtell

Finding that evidence of a prior accusation of trade secret theft was more prejudicial than probative, the U.S. Court of Appeals for the Sixth Circuit excluded, from a criminal trial, evidence of prior accusations of trade secret theft against two engineers. U.S. v. Qin, et al., Case No. 12-1015, (7th Cir., July 20, 2012) (Donald, C. J.).

In 2010, Yu Qin and his wife Shanshan Du were indicted for possessing stolen trade secrets. From 1985 to 2005, Qin was an electrical engineer at Controlled Power Company (CPC) and, at the time of his termination in 2005 held the position of vice president of engineering and research and development. Du also worked at CPC until some time in 2000. After leaving CPC in 2000, Du started working at General Motors (GM) as an engineer in its Advanced Technology Vehicles Group. During their respective employments at CPC and GM, both Qin and Du agreed to protect the confidential information of their respective employers.

In January 2005, Du’s supervisor at GM offered Du a severance package in return for her resignation. Du accepted the offer in March 2005 and certified that she had returned all GM records and materials in her possession. She also acknowledged her employment obligation not to disclose confidential information. In the summer of that same year, CPC’s vice president of operations became suspicious that Qin was engaging in additional outside activities. After some research, it was discovered that since 2000 Qin owned and operated a business known as Millennium Technologies International (MTI) that operated in direct competition with CPC. After CPC confronted Qin about his operation of MTI, CPC employees discovered a bag containing a large quantity of electrical components belonging to CPC and a hard drive that contained thousands of confidential files and intellectual property copied from GM by Du prior to the end of her employment.

The United States government charged Qin and his wife with conspiring to obtain trade secrets from GM pertaining to motor controls for hybrid vehicles. None of the charges against Qin and his wife related to Qin’s possession of confidential information belonging to CPC. CPC initiated a separate civil lawsuit asserting several causes of action, none of which related to the theft of CPC trade secrets.

Prior to trial the government provided Qin and Du’s counsel with notice of its intent to offer at the GM trade secret trial evidence that Qin appropriated resources of CPC for the benefit of MTI. Qin and Du filed a motion to exclude the evidence, arguing that introducing those allegations in a criminal trial would be would be more prejudicial than probative, particularly as to Du, to whom CPC did not attribute any of the underlying conduct forming the basis of CPC’s civil complaint. After the district court granted Qin and Du’s motion to exclude the evidence, an interlocutory appeal followed.

In reviewing the admissibility of prior bad acts, the 6th Circuit employs a three-step process for determining the admissibility of the evidence: 1) whether there is sufficient evidence that the other act in question actually occurred, 2) whether the evidence of the other act is probative of a material issue other than character, 3) if the evidence is probative of a material issue other than character, whether the probative value of the evidence is substantially outweighed by its potential prejudicial effect. Reviewing the first factor, the 6th Circuit reasoned that while the government contends its proof would be straightforward, Qin would have every incentive to refute the government’s allegations with proof of his own. Accordingly, given the parties’ positions, the 6th Circuit found the evidence could reasonably support a finding on both sides of the issue. However, for the purposes of the appeal, they assumed without deciding that there was sufficient evidence to support a jury finding that Qin appropriated CPC resources for the benefit of MTI.

Moving to the second step, the 6th Circuit reviewed whether the evidence was probative of a material issue other than character. The government purported to offer the evidence to show Qin and Du’s specific intent, participation in a common scheme or plan, and absence of mistake or accident. Accepting the government's stated purpose, the 6th Circuit turned to the central issue, whether evidence of Qin’s alleged misappropriation of CPC information is probative of Qin and Du’s specific intent to steal trade secrets from GM. The 6th Circuit determined that it might be possible to generalize Qin’s conduct in a way as to make it sound similar to the conduct that forms the subject of the indictment (i.e., that Qin stealing from CPC is substantially similar to Qin and Du stealing from GM), but that the two situations were fundamentally different. The 6th Circuit therefore affirmed the district court’s determination that the acts were not substantially similar, and that in addition to lacking probative value, the evidence would be highly prejudicial to Qin and Du and should be excluded.

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IP Update, Vol. 15, No. 8, August 2012

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