Federal Circuit Review - March 2018

by Knobbe Martens

Knobbe Martens

Distribution Agreements Can Constitute Offers for Sale Under Section 102(b)

In The Medicines Company v. Hospira, Inc., Appeal Nos. 2014-1469, 2014-1504, the Federal Circuit held that a distribution agreement qualified as an invalidating “offer for sale” under 35 U.S.C. § 102(b) when the terms of the agreement demonstrated the commercial character of an offer to sell the patented product.

The Medicines Company (“MedCo”) asserted two patents covering its Angiomax drug product against Hospira, a generic drug maker and ANDA filer.  Although Angiomax had been available for decades, MedCo developed a new method of formulating Angiomax to reduce impurities.  This formulation was the subject of the asserted patents, which issued on July 27, 2008.  Prior to filing the patents, MedCo entered into a distribution agreement on February 27, 2007 with Integrated Commercialization Solutions, Inc. (“ICS”) to distribute the new Angiomax formulation.  The agreement stated that MedCo “desire[d] to sell the Product” to ICS and ICS “desire[d] to purchase and distribute the Product.”  Under the agreement, title passed to ICS upon receipt of the Product at the distribution center.  The district court found that the invention was ready for patenting at the time of the agreement, but found that the patents were not invalid under § 102(b)’s on-sale bar because the distribution agreement between MedCo and ICS did not constitute an offer to sell.

The Federal Circuit reversed and remanded, finding that the terms of the distribution agreement showed that the agreement was an offer for sale.  In particular, the terms included a statement that MedCo desired to sell the product and that ICS desired to purchase the product.  The agreement also included the commercial price of the product and the transfer of title to ICS.  MedCo argued the agreement was not an offer for sale because it was permitted to reject all purchase orders.  The Federal Circuit noted, however, that the agreement required MedCo to use “commercially reasonable efforts” to fill the purchase orders, and MedCo would be unlikely to reject an order because ICS had exclusive distribution rights under the agreement and Angiomax constituted the majority of MedCo’s revenues.  Therefore, the Federal Circuit held that the distribution agreement did not constitute an optional sales arrangement, and instead contained all of the necessary terms and conditions to constitute a commercial offer for sale.  The Federal Circuit remanded for the district court to determine whether the offer to sell covered the patented invention.

A Section 101 Inquiry May Involve Both Questions of Fact and Questions of Law

In Berkheimer v. HP Inc., Appeal No. 2017-1437, the Federal Circuit held (1) the term “archive exhibits minimal redundancy” was indefinite, as a skilled artisan would not have known the meaning of “minimal redundancy” with reasonable certainty, and (2) the district court erred in concluding there were no underlying factual questions to the § 101 inquiry, because while patent eligibility is ultimately a question of law, the underlying question of whether something is “well-understood, routine, and conventional” is a factual issue.

Berkheimer asserted a patent relating to digitally processing and archiving files.  The district court held several claims invalid after concluding that the claim term “archive exhibits minimal redundancy” was indefinite.  HP then moved for summary judgment that the remaining claims were ineligible under 35 U.S.C. § 101.  The district court granted that motion and Berkheimer appealed to the Federal Circuit.

The Federal Circuit affirmed the district court’s finding of indefiniteness.  The specification itself used inconsistent terminology to describe the level of redundancy the system achieved.  The specification also did not contain any point of comparison to determine an objective boundary for what “minimal” meant. 

With respect to the § 101 decision, the Federal Circuit affirmed in part and remanded in part.  Regarding the first step of Alice, determining whether the claims at issue were directed to a patent-ineligible concept, the Federal Circuit concluded each of the claims was directed to an abstract idea.  Regarding the second step of Alice, considering the elements of each claim both individually and as an ordered combination to determine whether the additional elements transformed the nature of the claim into a patent-eligible application, the specification disclosed an inventive feature of storing data in a technologically beneficial way.  It also described how and why that feature was unconventional.  As a result, there was a genuine issue of fact as to whether the claims recited “well-understood, routine, and conventional activities to a skilled artisan.”  Thus, the Federal Circuit remanded with respect to certain claims directed towards that concept.  

“Subjective Preference” Is Insufficient to Establish “Teaching Away”

In Polaris Industries, Inc. v. Arctic Cat, Inc., Appeal Nos. 2016-1807, 2016-2280, the Federal Circuit reiterated that an evaluation of “teaching away” requires consideration of whether a reference “criticize[s], discredit[s], or otherwise discourage[s]” modifying the prior art in the manner claimed.

Arctic Cat filed two inter partes review petitions challenging Polaris’s patent, which is directed to all-terrain vehicles (ATVs) with two side-by-side seats.  In the first IPR (“the 1427 IPR”) the Board found the claims unpatentable as obvious over one combination of references, and in the second IPR (“the 1428 IPR”) the Board found that the claims were not proven unpatentable over a second combination of references.  Both parties appealed.

On appeal, Polaris challenged the Board’s finding of a motivation to combine in the 1427 IPR.  The Federal Circuit affirmed the Board’s finding for two claims, but reversed with respect to a third claim.  The third claim recited an ATV with side-by-side seats which, among other things, includes a fuel tank under one of the seats.  The Board found that such a configuration would have been obvious to a person of ordinary skill in the art in view of a reference that taught an ATV with side-by-side seats.  Polaris argued that the reference relied on by the Board taught away from including such a fuel tank because the reference taught that maintaining a low center of gravity was a goal of the disclosure.  Polaris’s expert testified that modifying the ATV to include a fuel tank under the seats would substantially raise the center of gravity.  The Board dismissed this argument, stating that the low center of gravity was a “subjective preference” that did not rise to the level of a teaching away.  The Federal Circuit reversed, finding that the “subjective preference” test had no basis in precedent, and instructed the Board to perform the usual teaching-away analysis on remand.  The Federal Circuit noted that even if the Board determined that the reference did not teach away, the statements in the reference would still be relevant in determining whether there was a motivation to combine.

The Federal Circuit also rejected challenges to the Board’s claim constructions, finding the Board properly relied on the “broadest reasonable interpretation” standard.  The Federal Circuit addressed Polaris’s arguments regarding evidence of commercial success, reversing the Board and instructing the Board to consider Polaris’s undisputed evidence of commercial success.

Finally, the Federal Circuit addressed Arctic Cat’s challenges regarding the 1428 IPR.  The Federal Circuit rejected Arctic Cat’s claim construction arguments, finding that Arctic Cat’s proposed construction was not reasonable in light of the specification and other evidence.

Pleadings Can Present Factual Questions Sufficient to Survive a Motion to Dismiss Under Section 101

In Aatrix Software, Inc. v. Green Shades Software, Inc., Appeal No. 2017-1452, the Federal Circuit held that allegations in the complaint describing prior art problems solved by the claimed invention presented factual disputes sufficient to survive a Rule 12(b)(6) motion under § 101. 

Aatrix sued Green Shades for infringement of two patents directed to systems and methods for designing, creating, and importing data into a viewable form on a computer.  Green Shades moved to dismiss under § 101.  The district court granted the motion and denied leave to file a proposed amended complaint.  Aatrix appealed to the Federal Circuit.  

The Federal Circuit held that the allegations in the proposed amended complaint raised factual disputes sufficient to survive a motion to dismiss based on Alice/Mayo.  The Alice/Mayo test involves subsidiary fact questions, including whether the claimed elements were well-understood, routine, or conventional.  Here, Aatrix’s proposed amended complaint contained allegations describing the development of the patented invention, problems present in the prior art, and how the patented invention solved those problems.  The Federal Circuit vacated the district court’s dismissal pursuant to Rule 12(b)(6), reversed the district court’s denial of Aatrix’s motion for leave to file an amended complaint, and remanded because the allegations in the proposed amended complaint presented a factual issue that could not be resolved on a motion to dismiss.  

Judge Reyna concurred with the majority’s disposition but dissented from much of the majority’s analysis.  Judge Reyna argued that the majority’s analysis put too much emphasis on subsidiary factual questions underlying the legal § 101 question.  Judge Reyna also argued the Federal Circuit should have remanded without discussing, in the first instance, whether the proposed amended complaint was sufficient under Rule 12(b)(6) to survive a § 101 challenge.  

Claim Construction Disputes Are Not Suitable for Resolution on a Motion to Dismiss

In Nalco Company v. Chem-Mod, LLC, Appeal No. 2017-1036, the Federal Circuit reiterated that a plaintiff need not prove its case of patent infringement at the pleading stage.  Additionally, the Federal Circuit held that, to the extent a defendant disputes the pleaded allegations or claim scope, these inquiries are not suitable for resolution on a motion to dismiss.

Nalco’s asserted patent was directed to a method of removing elemental mercury from the flue gas created by combustion in coal-fired power plants.  Nalco alleged that the defendants’ combustion process operated in the same manner as the claimed method.  The district court granted the defendants’ motions to dismiss Nalco’s five successive complaints under Rule 12(b)(6) for factual deficiencies in pleading various infringement theories.  Nalco appealed the district court’s dismissal of its Fourth Amended Complaint.  

The Federal Circuit reversed the dismissal of Nalco’s Fourth Amended Complaint and remanded for further proceedings.  In reinstating all the claims, the Federal Circuit found that Nalco had adequately pled its infringement theories under the Twombly and Iqbal pleading standard.  For the direct infringement claims, the Federal Circuit found that Nalco had plausibly alleged its direct infringement theories and that the district court had inappropriately resolved disputes on a Rule 12(b)(6) motion without the benefit of claim construction.  The Federal Circuit also reversed the district court’s dismissals of the indirect infringement and willful infringement claims, which were solely based on the dismissal of the underlying direct infringement claim.  The Federal Circuit ruled that factual disputes related to those claims should not be resolved at the Rule 12(b)(6) stage.   

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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