IP Update, Vol. 16, No. 7, July 2013

by McDermott Will & Emery



“Reverse Payment” Settlements Face Greater Antitrust Scrutiny Following U.S. Supreme Court Ruling in FTC v. Actavis

Patent Office Reexamination Nullifies District Court Damages Award

Good-Faith Belief in Invalidity, Even if Mistaken, Negates Induced Infringement

Obvious to Try and the Prima Facie Obviousness Case

Combination of Prior Art Elements, Each Used According to Their Established Functions, Without a Surprising Result, Invalidates Bone Plate Patent

Claim Limitations Must be Substantially Similar for a Previous Disclaimer to Apply

Claim Not Enabled Where There Is Need for Excessive Experimentation

Internet Advertising Method Found to Be Patent-Eligible . . . Again

No Declaratory Judgment Jurisdiction Where Binding Assurances of No Litigation Eliminates Any Possible Justiciable Case or Controversy

International Trade Commission Addresses Use of Standard-Essential Patents in Section 337 Investigations

Federal Circuit Has Appellate Jurisdiction Over ITC’s Dismissal of Claim Based on Arbitration Agreement

Federal Circuit Not the Only Forum That Can Resolve Patent-Related Contract Disputes

First 100 Day Domestic Industry Initial Determination from ITC Concludes No Domestic Industry


Imperfect Blend: Fourth Circuit Holds Lanham Act , May Preempt North Carolina Gasoline Blending Statute


Next Time, Buy the CDs

Ambiguity as to Copyright Renewal Term Must Be Litigated

Trade Secrets

Course of Conduct Does Not Supplant Unambiguous Terms of an NDA

Patents / Reverse Payments (ANDA)

“Reverse Payment” Settlements Face Greater Antitrust Scrutiny Following U.S. Supreme Court Ruling in FTC v. Actavis
Federal Trade Commission v. Actavis, Inc.
by Jeffrey W. Brennan

Resolving a split among the U.S. Courts of Appeals, the U.S. Supreme Court ruled that patent infringement settlement agreements between branded and generic drug manufacturers containing “reverse payment” (“pay-for-delay”) provisions “can sometimes violate the antitrust laws” and that courts must apply the rule of reason when adjudicating antitrust challenges to them. A reverse payment settlement restricts the generic from entering the market until a future date (even if that date is before the patent at issue expires) and includes a transfer of value from the brand to the generic firm, typically in the form of payments arising from an ancillary agreement for services or products provided by the generic.  Federal Trade Commission v. Actavis, Inc., Case No. 12-416 (U.S. Supr. Ct., June 17, 2013 (Breyer, J.) (Roberts, Chief Justice, dissenting; joined by Thomas and Scalia, Justices).

The Supreme Court reversed the U.S. Court of Appeals for the Eleventh Circuit’s ruling that affirmed dismissal of a Federal Trade Commission (FTC) challenge to a reverse payment settlement. The Eleventh Circuit held that because the settlement allowed for generic competition before the brand’s patent expired, the agreement was within the “scope of the patent” and thus beyond the reach of antitrust law. The Court rejected this “scope of the patent test” and remanded for adjudication under the rule of reason, which requires the FTC to prove that the agreement’s anticompetitive effects outweigh its procompetitive effects.  The Court also rejected the FTC’s position (which the U.S. Court of Appeals for the Third Circuit had adopted in a different case) that reverse payment agreements are “presumptively anticompetitive” and that defendants should have the burden at trial to overcome the presumption.

Justice Breyer wrote the opinion, to which Chief Justice Roberts and Justices Scalia and Thomas dissented. Justice Alito did not participate.  According to the Court, a patent that is valid and infringed conveys a right to exclude, but an invalidated patent and a valid patent as to non-infringing products do not.  The patent case “put the patent’s validity at issue, as well as its actual preclusive scope” until settlement. Given that there is “reason for concern that settlements taking this form tend to have significant adverse effects on competition,” the Court said, “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well.”  The Court characterized as “novel . . . the dissent’s suggestions that a patent holder may simply ‘pa[y] a competitor to respect its patent’ and quit its patent invalidity or noninfringement claim without any antitrust scrutiny whatever.”

Continuing, the Court attributed its decision to five sets of considerations:

  • The “potential for genuine adverse effects on competition” from a payment that induces the generic to abandon its challenge for a share of the monopoly profits that would be lost in the competitive market.
  • A conclusion that “anticompetitive consequences [from reverse payments] will at least sometimes prove unjustified,” but not always, such as when the payment is “fair value for services.”
  • The observation that firms with market power, perhaps because of their patents, are best situated to pay large sums to protect their market.
  • The feasibility of an antitrust trial that does not require litigation of the patent: “An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival” and that the payment is intended to maintain higher prices.
  • The ability of parties to settle patent litigation without including reverse payments.

Further, the likelihood of anticompetitive effects from a reverse-payment settlement “depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”  The Court “[left] to the lower courts the structuring of the present rule-of-reason antitrust litigation.”

Practice Note:  The FTC is likely to continue to scrutinize settlements very closely and evaluate each for a potential investigation or legal challenge. Private actions will also likely continue, to the extent enough facts about settlement terms are publicly available to support a complaint.  Post-Actavis, courts for the first time must apply a rule of reason standard, as opposed to the “scope-of-patent” or “presumptively illegal” rules they have previously applied.  Antitrust law precedent in this area will develop, therefore, on a case-by-case basis. Companies and their counsel, when evaluating whether to enter into a reverse-payment settlement, should closely monitor current and future court cases for guidance on what facts most directly influence judges and juries in the adjudication of antitrust challenges to reverse payments.

Patents / Parallel Proceedings

Patent Office Reexamination Nullifies District Court Damages Award
Fresenius USA, Inc. v. Baxter International, Inc.
by Darryl J. Ong

Addressing the issue of whether the cancellation of claims by the U. S. Patent and Trademark Office (PTO) in reexamination proceedings binds district courts in pending litigation, a divided panel of the U.S. Court of Appeals for the Federal Circuit answered affirmatively, finding that the cancellation of claims in reexamination mooted the issue of infringement and vacated a district court's damages award.  Fresenius USA, Inc. v. Baxter International, Inc., Case Nos. 12-1334; 1335 (Fed. Cir., July 2, 2013) (Dyk, J.) (Newman, J., dissenting).

In 2003, Fresenius filed a declaratory judgment action of invalidity and non-infringement of three Baxter patents.  Baxter counterclaimed for infringement. Fresenius and Baxter manufacture hemodialysis machines, and the asserted claims of one of the patents were directed to a dialysis machine with an integrated touch screen interface. Fresenius also sought ex parte reexamination at the U.S. Patent and Trademark Office (PTO).

The district court declined to stay the case pending reexamination, found the patent was valid, and in 2007 entered judgment for Baxter, awarding damages of roughly $14 million. In 2009, the Federal Circuit affirmed as to the subject patent, reversed as to the other patents, vacated the damage award and remanded for reconsideration.

In 2010, the PTO Board of Patent Appeals and Interferences rejected the asserted claims of the subject patent as obvious. In March 2012, the district court entered final judgment awarding reduced damages to Baxter but stayed execution pending appeal of the PTO determination. In May 2012, the Federal Circuit affirmed the PTO’s determination, stating the decision was not inconsistent with its prior holding because the rejections were based on prior art references “not squarely at issue” during the district court trial.

Baxter argued in this appeal that the PTO’s cancellation cannot be given effect, because the district court’s 2007 judgment had conclusively decided the issue of validity, and that that decision was “final and binding” on the parties, resulting in res judicata effect within the pending litigation.

Distinguishing different concepts of finality, the Federal Circuit panel majority held the district court's 2007 judgment was final for the purposes of appeal but “not sufficiently final to preclude application of the intervening final judgment in In re Baxter.”  The Court found that its 2009 decision was not sufficiently final because it had been remanded for reconsideration of damages and thus “did not end the controversy between the parties.”

The Court also found no violation of Constitutional separation of powers. Comparing assertion of a cancelled patent to assertion of a right under an act of Congress later repealed, the majority wrote “unless it exists, and is in force at the time of trial and judgment, the suits fail.”

In dissent, Judge Newman viewed the Court’s ruling as an endorsement of “administrative abrogation of final judicial decisions” that is “contrary to the legislative purposes of reexamination…”  According to Judge Newman, the Federal Circuit’s 2009 decision affirming issues of validity and infringement constituted final judgment as to those issues, and a judicial decision that binds other courts, the parties and the public, must likewise bind the other branches of government.

Patents / Induced Infringement

Good-Faith Belief in Invalidity, Even if Mistaken, Negates Induced Infringement
Commil USA, LLC v. Cisco Sys., Inc.
by Hasan Rashid

Addressing the knowledge requirement as part of the prima facie case for induced infringement, the U.S. Court of Appeals for the Federal Circuit vacated a jury’s finding of infringement by inducement, finding negligence and recklessness do not amount to the knowledge required for inducement and that a good-faith belief of invalidity may negate the requisite intent for induced infringement.  Commil USA, LLC v. Cisco Sys., Inc., Case No. 12-1042 (Fed. Cir. June 25, 2013) (Prost, J.) (Newman, J. concurring-in-part, dissenting-in-part) (O’Malley, J., concurring-in-part, dissenting-in-part). 

Commil sued Cisco for direct and induced infringement of a wireless communication patent.  A first jury trial resulted in findings of validity, direct infringement, and damages.  The jury did not find induced infringement.  After the verdict, Commil moved for a new trial, and the trial court granted a partial re-trial on induced infringement and damages—the two issues Commil did not win in the first trial.  After a second trial, a second jury found induced infringement and awarded Commil roughly $64 million. 

Cisco appealed a number of issues, including a jury instruction on the knowledge element of inducement and the trial court’s exclusion of evidence that Cisco held a good-faith belief that the patent was invalid.

Regarding the jury instruction, the Federal Circuit analyzed the Supreme Court’s ruling in Global Tech.  The Federal Circuit found that Global Tech did not permit a finding of inducement based on recklessness or negligence.  The Federal Circuit found that the jury instruction permitted a finding of inducement on those grounds and was, thus, erroneous as a matter of law.

The Federal Circuit also considered whether a good-faith belief of invalidity may negate the requisite intent for induced infringement.  The Court stated that “no principled distinction” existed between a good-faith belief of non-infringement and a good-faith belief in invalidity insofar as specific intent is concerned.  The Court thus found that a good-faith belief of invalidity may negate intent for inducement purposes.  Vacating the verdict, the Court found that either belief may negate the specific intent to encourage another’s infringement. 

Judge Newman dissented, likening induced infringement to tort liability.  She equated a mistaken, albeit good-faith, belief in invalidity with a mistake of law.  Just as a mistake of law does not absolve a tortfeasor, a mistaken belief that a patent is invalid (a question of law) similarly cannot absolve a party from induced infringement.  In other words, “whether there is infringement in fact does not depend on the belief of the accused infringer that it might succeed in invalidating the patent.”  In response, the majority sidestepped Judge Newman’s dissent in a footnote, saying it “does little more than construct a straw man and set him ablaze.” 

Judge O’Malley dissented from the majority’s upholding of the district court’s grant of a partial retrial on issues Commil lost and from the majority’s refusal to address Cisco’s argument that Commil failed to identify a direct infringer in alleging induced infringement.

Patents / Obviousness

Obvious to Try and the Prima Facie Obviousness Case
Novo Nordisk A/S v. Caraco Pharmaceutical Labs. Ltd.
by Paul Devinsky

In a case that has now been three times to the U.S. Court of Appeals for the Federal Circuit and once to the Supreme Court, the Federal Circuit has affirmed a district court ruling that the patent covering the diabetes drug PRANDIN® is invalid as obvious.  Novo Nordisk A/S v. Caraco Pharmaceutical Labs. Ltd., Case No. 11-1223 (Fed. Cir., June 18, 2013) (Prost, J.) (Newman, J., dissenting).  However, the Federal Circuit reversed the district court finding that the patent in issue was unenforceable as a consequence of inequitable conduct. 

Novo Nordisk, proprietor of the PRANDIN® repaglinide product, listed the subject patent in the Orange Book for that product. (See IP Update, Vol. 15, No. 8.)  The patent claim in issue simply recited treatment of Type II diabetes by administering rapaglinide in combination with another compound, metformin.  Novo Nordisk asserted that the combination therapy achieved superior results than either of the drugs administered alone (monotherapy).  After the district court found the claim both invalid as obvious and unenforceable due to inequitable conduct, Novo Nordisk appealed. 

On appeal Novo Nordisk argued that the district court reached its conclusion of obviousness based on a prima facie case of obviousness presented by Caraco, i.e., that it was obvious to try the combination therapy of metformin and repaglinide to treat Type II diabetes since it was “well-known in the art that two drugs having different mechanisms for attacking diabetes may be more effective than one” and that drugs were often tested in combination therapy.  After doing so, Novo Nordisk argued, the district court improperly put the burden on Novo Nordisk to prove the claim was not obvious. 

The Federal Circuit disagreed, explaining that the district court properly applied the presumption of validity, requiring Caraco to present its evidence of invalidity in the first instance.  Only after the district court found “that Caraco’s prima facie evidence, if unrebutted, would be sufficient to establish that the repaglinide/metformin combination was obvious to try, and that a person of ordinary skill in the art would have reasonably expected the combination would yield success in the form of beneficial, and even synergistic, results” did it consider whether Novo’s countervailing secondary consideration evidence of unexpected synergy (i.e., its “attempt to prove unexpected results) was sufficient to ‘overcome’ Caraco’s prima facie case.”  The Federal Circuit explained that it was not until the district court evaluated “all evidence of unexpected synergy and commercial success,” that it reached its conclusion that … Caraco had shown by clear and convincing evidence that the combination was obvious.”

The Federal Circuit also disagreed with Novo Nordisk’s secondary argument that notwithstanding the district court’s allocation of evidentiary burdens, its ultimate conclusion was wrong.  To the contrary, the Federal Circuit found the district court’s reasoning was spot on:

It is reasonable that an artisan seeking to combine a known insulin sensitizer (like metformin) with a new insulin secretagogue (like repaglinide) would base his expectations upon prior art sensitizer/secretagogue combinations.

Finally, the Federal Circuit found no error by the district court in declining to defer to the patent examiner’s finding on the issue of synergy: 

“the initial determinations by the PTO in determining to grant the application are entitled to no deference as they would be in an appeal to this court under 28 U.S.C. § 1295(4)(A) or (absent new evidence) in a district court proceeding under 35 U.S.C. § 145. Rather, we treat the issued patent as having a presumption of validity that must be overcome by clear and convincing evidence. No decision of the Supreme Court or this court has ever suggested that there is an added burden to overcome PTO findings in district court infringement proceedings. …”

However, the panel did unanimously reverse the district court on the issue of inequitable conduct, concluding that while some of Novo Nordisk’s expert declarants statements to the PTO on the issues of unexpected results and synergy were “troubling,” they did not meet the “but for” materiality test.  This is not a case where a declarant hid adverse test results from the PTO in favor of more promising data selected post hoc. Nor is this a case where the declarant’s omission expressly undermined his stated opinion.

Patents / Obviousness

Combination of Prior Art Elements, Each Used According to Their Established Functions, Without a Surprising Result, Invalidates Bone Plate Patent
Smith & Nephew, Inc. v. Rea
by Douglas B. Espenschied

In a case arising from two inter partes reexaminations, the U.S. Court of Appeals for the Federal Circuit reversed a decision of the Patent Trial and Appeal Board (Board) and concluded that the claimed subject matter would have been obvious.  Smith & Nephew, Inc. v. Rea, Case No. 12-1343 (Fed. Cir., July 9, 2013) (Bryson, J.). 

Smith & Nephew requested reexamination of a patent assigned to Synthes.  On reexamination, the examiner rejected all of the patent’s claims as obvious. The Board reversed the rejections of some claims.

The patent claimed a system for using plates to repair fractures in long bones. The dispute focused on the structure of holes in a head portion of the plate through which screws are inserted. The representative claim required at least three screw holes in the head portion that are conically tapered from the top surface of the plate to the bottom surface and that are at least partially threaded to engage the threads on the head of a screw. Although not required by the claim, the specification indicated that the holes could advantageously be used with both locking screws, which have threaded heads, and compression screws, which have heads without threads.

A prior art Synthes plate satisfied all of the claim limitations except for the holes’ configuration. The prior art also included a modified version of the prior art Synthes plate with threaded holes and another plate having a mix of threaded and unthreaded holes. A prior art article suggested “selective locking of the screws to the plate” as a solution to the problem that screws “can angulate . . . and are not fixed in a constant relationship.”  Smith & Nephew appealed. 

The Board ruled that removing the non-threaded holes from the head portion of the prior art plates would not have been expected to allow the plates to impart compression between the head portion and the bone.

On appeal, the Federal Circuit criticized the Board ruling that the claim did not require compression. The Federal Circuit explained that “[t]he patentability of the invention . . . turns on the structure of the holes, not the special nature of the non-locking screw that is to be used with those holes.”

The Federal Circuit also criticized the Board’s analysis for failing to read the prior art for all that it teaches. Another modified version of the prior art Synthes plate used only conically tapered, threaded holes. However, the Board disregarded the conical geometry of this plate because it concluded that conventional compression screws would sit too high in these holes and therefore cause complications to the patient.

Additionally, the Federal Circuit criticized the Board’s analysis for failing to consider prior art plates that supported rebuttal of Synthes’s argument that the prior art combinations would have been inoperable. Two prior art Synthes plates, for fractures in other types of bones, that included only partially threaded holes for using either locking screws or compression screws.  The holes of one of these two plates also included unthreaded, conically flared upper portions.

The Federal Circuit concluded that compelling evidence indicated that it would have been obvious to modify prior art plates to have only threaded holes in the head portion.

The Federal Circuit also concluded that it would have been obvious to combine the partially threaded, untapered holes of the prior art plates, with the conically tapered, partially threaded holes of the prior art stabilization plate, observing that no evidence before the Board indicated that the claimed conically tapered holes “would produce a surprising result or involve anything more than a choice among designs already found in the prior art.”

Because conical, partially threaded holes were well known in the art, as was the advantage of adding more of them to the head in place of unthreaded holes, and the screws and the holes perform their conventional, expected function in securing the plate, the Federal Circuit concluded that claims would have been obvious.

Patent / Anticipation

Claim Limitations Must be Substantially Similar for a Previous Disclaimer to Apply
Regents of the Univ. of Minn. v. AGA Med. Corp.
by Brett Bachtell

Addressing the issue of prosecution disclaimer in the context of a predecessor patent, the U.S. Court of Appeals for the Federal Circuit affirmed a summary judgment of invalidity by anticipation, finding that a possible disclaimer made during prosecution of the application for a predecessor patent did not apply to the patent-in-suit because the pertinent claim limitations were not substantially similar.  Regents of the Univ. of Minn. v. AGA Med. Corp., Case No. 12-1167 (Fed. Cir., June 3, 2013) (Dyk, J.).

Regents of the University of Minnesota owns patents directed to medical devices for repairing heart defects and sued AGA Medical for infringement of those patents.  Following a claim construction hearing, the district court granted summary judgment that the patents were invalid as anticipated.  The university appealed.

The university argued that it had previously disclaimed the structure of the prior art reference during the prosecution of a predecessor patent.  The Federal Circuit disagreed.  The Federal Circuit found that the scope of the claim language was not substantially the same as that in the earlier pending application and therefore the previous disclaimer was not applicable. 

During claim construction, the district court determined the asserted claims of the patent should be treated as means-plus-function claims under § 112(f).  After claim construction, the district court found that asserted claims were invalid because the structure of the prior art reference was equivalent to the structure claimed in the asserted patent.  On appeal, the University argued that the structure of the prior art reference had been disclaimed during the prosecution of a predecessor patent. 

The Federal Circuit determined that the previous disclaimer was associated with a claim that did not include a means-plus-function element.  The Federal Circuit further explained that the proper inquiry is whether the scope of the claim limitation is substantially the same in the subsequent application as it was in the earlier application and the appropriate focus is on the scope of the claim element, not the meaning of particular words in isolation. 

The Federal Circuit evaluated the similarity between the earlier and later claim limitations and would only carry the disclaimer forward if there are only immaterial differences.  Applying this reasoning, the Federal Circuit found that the basis for distinguishing the prior art in the asserted patent was not the same as the predecessor application and the asserted patent contained a different claim limitation.  Thus, the original disclaimer did not carry over to limit the range of equivalents for the asserted patent and did not negate the district court’s anticipation finding.

Patents / Enablement

Claim Not Enabled Where There Is Need for Excessive Experimentation
Wyeth and Cordis Corp. v. Abbott Labs., Inc.
by Paul M. Zagar, M.D., and Stephanie Backovic, Ph.D.

Addressing the issue of whether disclosure of a single species and methods for identifying other species enabled method of treatment claims covering a genus of compounds, the U.S. Court of Appeals for the Federal Circuit affirmed summary judgment of invalidity for non-enablement, finding that there was no genuine dispute that practicing the full scope of the claims, measured at the time of filing, would require excessive experimentation.  Wyeth and Cordis Corp. v. Abbott Labs., Inc., Case Nos. 12-1223, -1224 (Fed. Cir., June 26, 2013) (Moore, J.). 

The patents-in-suit claim methods for treating or preventing restenosis (the re-narrowing of an artery, e.g., after balloon angioplasty) by administering an effective amount of rapamycin.  The district court construed rapamycin to include the genus of compounds containing a macrocyclic triene ring structure produced by Streptomyces hygroscopicus and having immunosuppressive and anti-restenotic effects.  The specification disclosed sirolimus, a species falling within the genus, and known assays for determining the immunosuppressive and anti-restenotic effects of candidate compounds.  The specification did not provide guidance on preferred substituent groups or on how to structurally modify sirolimus to yield compounds with anti-restenotic effects.  Based on the scope of the claimed subject matter, the district court concluded that the claimed subject matter was not enabled by the specification.  Wyeth appealed. 

The Federal Circuit agreed with the district court that the scope of the claims was broad and the art was an unpredictable one.  To identify the candidate compounds falling within the claims, one of ordinary skill in the art would need to screen each of thousands of candidate compounds in restenosis assays.  Noting that undue experimentation is a matter of degree, the Court held that the amount of experimentation in this instance was excessive.  The claimed genus potentially included tens of thousands of compounds, and the specification was silent regarding the structural modifications that would preserve the claimed utility.

The Federal Circuit found that there was no genuine dispute that it would be necessary to synthesize and then screen each candidate compound using the assays disclosed in the specification to determine whether the compound had immunosuppressive and anti-restentoic effects.   Even where the experimentation is routine, the amount of experimentation is “not without bounds.”  Here, the bounds were exceeded because the specification disclosed “only a starting point for further iterative research in an unpredictable and poorly understood field.”

Patents / Subject Matter Eligibility

Internet Advertising Method Found to Be Patent-Eligible . . . Again
Ultramercial v. Hulu
by Gregory D. Yoder

Addressing patentable subject matter eligibility of an online method for distributing media to consumers by having the consumers first watch a paid advertisement, the U.S. Court of Appeals for the Federal Circuit reversed a lower court’s ruling of patent ineligibility, finding that the method was the application of an idea and constituted patent-eligible subject matter under 35 U.S.C. § 101.  Ultramercial v. Hulu, Case No. 10-1544 (Fed. Cir., June 21, 2013) (Rader, C.J.).

Ultramercial obtained a patent claiming a method of distributing copyrighted products (e.g., songs, movies and books) over the internet.  Under the patented method, the consumer receives a copyrighted product for free in exchange for viewing an advertisement, and the advertiser pays for the copyrighted content.  After Ultramercial sued Hulu, YouTube and WildTangent for infringement of its patent, the district court, citing Bilski (see IP Update, Vol. 11, No. 11) granted WildTangent’s motion to dismiss on the basis that the patent did not claim patent-eligible subject matter, but only an abstract idea.  The Federal Circuit reversed the district court and remanded for further proceedings.  However while that remand was pending, the Supreme Court vacated the Federal Circuit’s decision for reconsideration in view of its decision on Mayo (IP Update, Vol. 16, No. 6).  Based on the earlier Federal Circuit remand order (IP Update, Vol. 14, No. 10), the district court again found that the patent did not claim patent-eligible subject matter, rather, that it claimed the abstract idea of using advertising as currency.  Again, Ultramercial appealed.

Again, the Federal Circuit reversed, explaining that § 101 is a threshold check on patent eligibility and should be given wide scope to liberally encourage ingenuity. As the Court explained, the Supreme Court has over time created categories of ineligible subject matter, including abstract ideas and laws of nature.  However, the Federal Circuit has cautioned that to be patent-ineligible, an abstract idea should exhibit itself so manifestly as to override the broad statutory categories of eligible subject matter and that even the application of an abstract idea may well be deserving of patent protection.

As a procedural matter, the district court found the patent ineligible in the context of defendant’s Rule 12(b)(6) motion to dismiss for failure to state a claim. The Court noted that finding a patent invalid under § 101 based on a 12(b)(6) motion to dismiss should be the exception, not the norm, as even though it is ultimately a question of law, the decision will often be wrought with questions of fact. The Court further noted that there is a presumption that issued patents claim eligible subject matter and that the accused infringer must provide clear and convincing evidence to prove the contrary.  Further, the Court noted the district court did not construe the claims, which is normally required when deciding patent eligibility under § 101. The Federal Circuit found that the district court erred in requiring the patentee to come forward with a claim construction that would show the claim were eligible.  This requirement flips the burden of persuasion on its head, as the claim is presumed to be patent-eligible due to the patent office’s issuance of the claim.

The Federal Circuit focused on the distinction between a patent directed to abstract idea compared to an application of an abstract idea. The Court noted that the whole claim must be considered, and the analysis cannot ignore steps of a method that are found in the prior art, as a new combination of prior art steps can lead to a patentable claim. The Court confirmed that the relevant query is whether a claim, as a whole, includes meaningful limitations restricting it to an application of an idea, rather than merely an abstract idea. The Court found that a claim is not meaningfully limited if its purported limitations provide no real direction, cover all possible ways to achieve the provided result or are overly-generalized. Further, a claim is meaningfully limited if it requires a particular machine implementing a process or a particular transformation of matter, or if it recites added limitations which are essential to the invention.

The Federal Circuit agreed that the idea of using advertising as a form of currency is an abstract idea.  However, the Court found that the asserted claims put meaningful limitations on that idea, specifically that the steps of the method require intricate and complex computer programming, and several steps require that the method be performed through computers, on the internet and in a cyber-market environment. The application of the idea overcomes the problem that viewers of copyrighted material could ignore banner ads or skip over advertising before accessing the copyrighted material

Patents / Declaratory Judgment Jurisdiction

No Declaratory Judgment Jurisdiction Where Binding Assurances of No Litigation Eliminates Any Possible Justiciable Case or Controversy
Organic Seed Growers and Trade Ass'n v. Monsanto Company
by Cynthia Chen, Ph.D. 

Addressing the case and controversy requirement for declaratory judgment jurisdiction, the U.S. Court of Appeals for the Federal Circuit affirmed the dismissal of a declaratory judgment suit for lack of jurisdiction, finding non-justiciable case or controversy where the defendant had made binding assurances that removed any risk of suit against the plaintiffs.  Organic Seed Growers and Trade Ass'n v. Monsanto Company, Case No. 12-1298 (Fed. Cir., June 10, 2013) (Dyk, J.).

At issue in the case were 23 patents owned by Monsanto related to various aspects of genetically modified crops.  The plaintiffs were growers, seed-selling businesses, and agricultural organizations that grow, use or sell conventional seeds.  The plaintiffs did not want to use or sell seeds incorporating Monsanto’s technologies.  The plaintiffs alleged a concern that they would be nonetheless liable for inadvertently growing patented seeds due to contamination.  The plaintiffs requested a written covenant not to sue from Monsanto.  Monsanto did not provide a covenant, but instead directed plaintiffs to an explicit statement posted on Monsanto’s website regarding inadvertent contamination and infringement.  The statement said that it is not Monsanto’s policy to “exercise its patent rights where trace amounts of our patented seeds or traits are present in farmer’s fields as a result of inadvertent means.”  Further, Monsanto, through its counsel, assured that Monsanto had no intention to sue under the circumstances.

The district court dismissed the suit for lack of subject matter jurisdiction, finding that the circumstances did not amount to a substantial controversy and there was no injury traceable to Monsanto.  The plaintiffs appealed.

The Federal Circuit agreed with district court that plaintiffs lacked standing under the Declaratory Judgment Act.  The plaintiffs conceded that Monsanto had never or threatened suit against them, relying instead on Monsanto’s past record of enforcing its patent rights.  The Federal Circuit’s analysis focused on the question whether Monsanto’s representations that it would not sue for inadvertent infringement were sufficient to “moot any potential controversy” and defeat standing.

The Federal Circuit noted that the Supreme Court held that a covenant not to sue can moot a controversy between the parties.  Here, Monsanto did not provide a written covenant not to sue, but the Federal Circuit found that Monsanto’s binding assurances had the same effect, stating that Monsanto’s representations unequivocally disclaimed any intent to sue plaintiffs for inadvertently using or selling trace amounts of genetically modified seeds. 

The Court cited three “main factors” that could mitigate in favor of judicial estoppel were Monsanto to file a suit: a party’s later position is “clearly inconsistent” with its prior position, the party successfully persuaded a court to accept its prior position and the party “would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Here, the Federal Circuit concluded that all three factors would warrant application of judicial estoppel.  Because plaintiffs had alleged no concrete plans or activities to use or sell greater than trace amounts of modified seeds, the Federal Circuit agreed that district court correctly found that it lacked declaratory judgment jurisdiction.

Patents / ITC

International Trade Commission Addresses Use of Standard-Essential Patents in Section 337 Investigations
Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers
by Christopher L. May

The International Trade Commission (ITC) addressed for the first time the issue of whether infringement of a patent that has previously been declared “standard-essential” may form the basis for either a limited exclusion order or cease-and-desist order under a § 337, ruling that nothing in the ITC’s enabling statute prevents issuing an exclusion order, even if the complainant is under an obligation to license the patent.  Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, Inv. No. 337-TA-794, (U.S. ITC, June 4, 2013) (ITC, per curiam); Commissioner Pinkert, dissenting). 

The complainant, Samsung Electronics, held two patents that it had previously declared to be “standard-essential” to the Universal Mobile Telecommunications System promulgated by the European Telecommunications Standards Institute (ETSI).  ETSI’s Intellectual Property Rights policy required Samsung to offer licenses to such patents on fair, reasonable and non-discriminatory (FRAND) terms.  After licensing negotiations between Samsung and the respondent, Apple, broke down, Samsung filed a complaint at the ITC requesting a limited exclusion order against Apple’s mobile communication products.  After the administrative law judge ruled, on an initial determination (ID), that none of the patents at issue were valid and infringed, the ITC determined to review the ID and sought views from both the parties and the public as to whether Samsung’s declaration of the patents at issue as “standard-essential” should affect either the ITC’s analysis of whether there was a violation of § 337 or what relief should be provided.

In its final determination, the ITC found one of the two patents to be both valid and infringed, and that the proper relief was a limited exclusion and cease-and-desist order directed to the infringing articles.  The ITC first rejected Apple’s argument that the Commission should not investigate an alleged violation of § 337 based on infringement of patents subject to a FRAND undertaking, ruling that under § 337(b)(1), the ITC is required to investigate any alleged violation based upon a complaint under oath, whether or not those patents have been declared standard-essential.  The ITC also rejected Apple’s theory that the Commission “cannot address infringement of standard-essential patents other than in the exceptional scenarios such as where a potential licensee has refused to pay a royalty after a U.S. court has determined that royalty to be FRAND, or where no U.S. court has jurisdiction over the potential licensee in order to set a FRAND rate,” ruling that the remedies provided under § 337 could be imposed in addition to any damages or injunctions available from a district court. 

The ITC further determined that Apple had not “properly argued any affirmative defense that would preclude the Commission from finding a violation based on assertion of a declared-essential patent,” such as a breach of contract, promissory estoppel, laches or fraud  The ITC ruled that even if Apple had offered sufficient evidence that the FRAND declaration was a legally enforceable obligation, the patents at issue were actually necessary to practice the standard and that Samsung was required to grant irrevocable licenses under FRAND terms to any party, it still would not have found in Apple’s favor, because the parties’ final offers were sufficiently close to each other that Samsung did not violate its obligation to negotiate in good faith.  Importantly, the ITC found that Samsung was not under any obligation to make an initial offer that was FRAND, because “the SSO intends the final license to be accomplished through negotiation” and “even if it were true that a FRAND agreement that requires Apple to pay Samsung ultimately is not reasonable, the offers that Apple criticizes do not necessarily demonstrate that Samsung has violated its FRAND obligations by failing to negotiate in good faith” (emphasis in original).  Finally, the ITC rejected the theory that whether a patent has been declared standard-essential should be considered when the public interest is analyzed, finding that its consideration of the public interest is limited solely to the four factors listed in § 337(d)(1).

Uncommonly for a Commission opinion, Commissioner Dean Pinkert wrote a dissent arguing that the ITC should not issue an exclusion order based on Samsung’s obligation to license the patents on a FRAND basis, that the evidence indicated Samsung was unwilling to make a FRAND licensing offer with respect to the standard-essential patents and that the absence of a FRAND offer should have a bearing on whether relief under § 337 is in the public interest.  Specifically, Commissioner Pinkert found that it was neither fair nor non-discriminatory for a FRAND-encumbered patent holder to require licenses to non-FRAND-encumbered patents as a condition for licensing the FRAND-encumbered patent.  Commissioner Pinkert also would have found that the statutory language of § 337(d)(1), as well as the legislative history of the statute that “any evidence” of price gouging or monopolistic practices on the part of the complainant would be a proper basis for denying exclusion, suggests that the section should be read broadly. 

Practice Note:  The Commission’s rejection of a per se rule barring exclusion orders for patents that have been declared standard-essential is likely to lead to have a number of effects, including increased litigation of standard essential patents at the ITC, counter-suits requesting that a district court rule determine what royalty rate is FRAND and/or requesting that a complainant be enjoined from proceeding before the ITC, presidential review taking on increased importance and potential legislative action to curb the ITC’s jurisdiction. 

Patents / ITC / Appellate Jurisdiction

Federal Circuit Has Appellate Jurisdiction Over ITC’s Dismissal of Claim Based on Arbitration Agreement
InterDigital Communications, LLC v. Int’l Trade Comm’n
by Christopher G. Paulraj

The U.S. Court of Appeals for the Federal Circuit has concluded that it has jurisdiction to hear an appeal from a determination made by the U.S. International Trade Commission (ITC) to terminate a § 337 investigation as to a respondent based on an arbitration agreement.  InterDigital Communications, LLC v. Int’l Trade Comm’n, Case No. 2012-1628 (Fed. Cir., June 7, 2013) (Prost, J.) (Lourie, J., dissenting).  Addressing the merits of the arbitration claim at issue, the Federal Circuit found that the ITC’s termination was erroneous because the claim for arbitration was “wholly groundless.” 

InterDigital filed a complainant against LG Electronics and other respondents alleging a violation of § 337 based on the importation of 3G wireless products that infringed certain InterDigital patents.  LG sought to terminate the investigation on the basis that its accused products were covered by a prior license agreement, and that agreement included a clause requiring any dispute arising under the agreement to be resolved through arbitration.  Applying the two-part test articulated by the Federal Circuit in Qualcomm v. Nokia, the ITC administrative law judge found that the parties clearly delegated the question of arbitrability to the arbitrator, and that LG’s request for arbitration was not “wholly groundless.”  The ITC determined not to review this finding and terminated the investigation as to LG.  InterDigital appealed this determination to the Federal Circuit.

As a threshold issue, the Federal Circuit addressed whether it has jurisdiction to hear the appeal.  The Federal Circuit’s jurisdictional statute broadly provides the court with exclusive jurisdiction to hear appeals of any “final determinations of the United States International Trade Commission relating to unfair practices in import trade, made under § 337.”  Section 337, in turn, lists various ITC determinations for which a party may seek appellate review.  Relevant to this appeal was the language in § 337(c) providing a right to appeal “a final determination of the Commission under subsection (d), (e), (f), or (g) of this section.”  The subsections referenced in that provision relate to ITC determinations on whether or not to issue an exclusion order or cease-and-desist order.  The ITC and LG argued that the termination of LG from the underlying investigation did not constitute a final determination on the merits under subsection (d), (e), (f) or (g), but rather was a termination based on an arbitration agreement in accordance with subsection (c) of the statute. 

The majority in the Federal Circuit panel disagreed with the ITC’s and LG’s position that § 337(c) only permitted appeals of final decisions on the merits.  Relying upon prior decisions in which the court addressed its appellate jurisdiction over ITC determinations, the majority noted that a party may appeal an ITC order that is not a final decision on the merits if “its effect upon appellants is the equivalent of a final determination.”  The panel majority also relied upon the strong presumption that Congress intends judicial review of administrative action, and the legislative history of the 1994 amendment to § 337(c) indicating that Congress “intended to bring ITC practice under § 337 into closer conformity with district court practice” under the Federal Arbitration Act. 

Judge Lourie dissented from this jurisdictional holding, finding that the statutory language is clear that a termination due to an arbitrability agreement is a termination “without . . . a determination” and thus could not be appealed.

Patents / Jurisdiction

Federal Circuit Not the Only Forum That Can Resolve Patent-Related Contract Disputes
MDS (Canada) Inc. v. Rad Source Technologies, Inc.
by Jeremy T. Elman

In a case of first impression for a regional court of appeals regarding the issue of whether the U.S. Court of Appeals for the Federal Circuit has exclusive jurisdiction to hear appeals of breach of contract claims that would require resolution of a patent infringement claim, the U. S. Court of Appeals for the Eleventh Circuit found that the Federal Circuit did not have exclusive jurisdiction and decided the merits of the breach of contract action.  MDS (Canada) Inc. v. Rad Source Technologies, Inc., Case No. 11-15145 (11th Cir., July 1, 2013) (per curiam).

The parties had signed a license agreement whereby plaintiff MDS Nordion agreed to market and sell defendant Rad Source Technologies’ patented medical devices that irradiate blood to eliminate pathogens and other microbes to reduce the risk of infections.  The first such product was the RS3000.  The license agreement prevented Rad Source from developing technology that embodied the licensed patents.  Years later, MDS sold its business to Best Medical, another plaintiff, but Rad Source refused to consent to the assignment of the MDS-Rad Source license agreement. After Rad Source developed a new blood irradiation device, the RS3400, MDS and Best Medical sent a cease-and-desist letter to Rad Source.  Rad Source responded that MDS had violated the parties’ license agreement by sub-licensing.  The present suit ensued. 

After a 10-day bench trial, the district court entered a preliminary injunction as to the sales of the RS3400, but denied damages.  Both sides appealed. 

The 11th Circuit considered whether the Federal Circuit properly had jurisdiction over the appeal, an issue of first impression for the 11th Circuit.  The 11th concluded that the Federal Circuit did not have exclusive jurisdiction over contracts where patent issues were involved.  The 11th Circuit recognized that the Federal Circuit has exclusive jurisdiction over appeals where jurisdiction is based on 28 U.S.C. §1338 for civil actions relating to patents.  The 11th Circuit also recognized that the instant dispute necessarily raised patent issues because Rad Source was prevented from developing technology that embodied the patents and the parties disputed whether the RS3400 embodied the patents. 

The 11th Circuit found, however, that in resolving this dispute, the question of patent infringement was “not substantial,” relying upon the Supreme Court’s recent ruling in Gunn v. Minton.  Using the three-factor test laid out in Gunn, the 11th Circuit found that the question was not substantial because it was a mixed question of fact and law (not a pure question of law), it was a fact-specific case that will not control other cases as precedent and, finally, the government’s interest in having any single case of patent infringement heard in a federal forum is limited.  The 11th Circuit also noted that if every breach of contract case that involved a patent dispute could only be heard in the Federal Circuit, it would “upset the congressionally approved balance of federal and state judicial responsibilities.”

Having concluded that it had jurisdiction, the 11th Circuit considered the merits of the breach of contract claims, analyzing whether the RS3400 embodied the licensed patents.  The 11th Circuit affirmed the district court’s conclusion that the RS3400 did not infringe, either literally or under the doctrine of equivalents, and therefore did not embody the licensed patents. 

Patents / ITC

First 100 Day Domestic Industry Initial Determination from ITC Concludes No Domestic Industry
Certain Products Having Laminated Packaging and Components Thereof
by Roozbeh Gorgin

In the first ruling under a new pilot program instituted to resolve key issues early in U.S. International Trade Commission investigations (ITC), an administrative law judge (ALJ) ruled that Lamina Packaging Innovations (Lamina) failed to meet the domestic industry requirement in a suit against Hasbro and others.  Certain Products Having Laminated Packaging and Components Thereof, Inv. No. 337-TA-874 (U.S. ITC, Jul. 5, 2013) (Essex, ALJ).

The 100-day domestic industry pilot program was launched by the ITC to test whether earlier rulings on certain dispositive issues in some § 337 investigations could limit unnecessary litigation, saving time and costs for all parties involved.  Under the pilot program, the ITC will identify, at institution, investigations that are likely to present a potentially dispositive issue (such as domestic industry) and direct the assigned ALJ to rule on that issue early in the investigation through expedited fact finding and an abbreviated hearing limited to the identified issue.  

In its complaint filed at the ITC, Lamina accused at least 15 companies of using packaging that infringe its patents.  When the ITC voted to institute the investigation, it ordered the ALJ to conduct an expedited review of whether the Lamina satisfied the domestic industry requirement of § 337 and issue a ruling on the issue within 100 days. The case was the initial test of the ITC’s new pilot program. 

Consistent with the ITC’s order, the ALJ assigned to the investigation issued an initial determination (ID), in which he found “that complainant has failed to satisfy the economic prong of the domestic industry requirement and has failed to show that a domestic industry is in the process of being established.” 

Practice Note:  As of this publication, the precise basis and rational for the ALJ’s ruling in Lamina is still unknown, as the initial determination is not yet publicly available.  However, if the ALJ’s decision against Lumina is affirmed by the ITC, the ALJ’s ruling will effectively terminate the investigation.

As the ITC understands its mandate under § 337 is to institute an investigation on any complaint that meets all of the statutory and regulatory requirements, the pilot program is a tool primarily to address filings made by non-practicing entities (NPEs) who may present fully compliant complaints but whose goal is not to protect a domestic industry, but to use expensive ITC litigation to force named respondents into less-favorable settlement positions.  Many practitioners and potential NPE target respondents will carefully follow the extent to which the ITC uses its new program and how it will affect filings at the ITC.


Imperfect Blend: Fourth Circuit Holds Lanham Act , May Preempt North Carolina Gasoline Blending Statute
Am. Petroleum Inst. v. Cooper
by Raymond M. Gabriel

The U.S. Court of Appeals for the Fourth Circuit recently remanded a challenge to a North Carolina fuel blending statute, holding the district court must evaluate if the statute prevents gasoline suppliers from exercising quality control of trademarked ethanol gas blends sold to consumers.  Am. Petroleum Inst. v. Cooper, No. 12-1078 (4th Cir. Jun. 6, 2013) (Motz, J., King, J. and Agee, J.) The Lanham Act preempts restrictions on quality control of trademarks, the appeals court said.  The Fourth Circuit ordered the district court to conduct further fact-finding whether the blending statute has a “significant negative impact” on the suppliers ability to ensure that blended gasoline bearing their trademarks meets the level of quality needed to safeguard their trademark rights and prevent consumer confusion.

Underlying this issue are two common ethanol-gasoline blending methods.  Suppliers conduct the first, called “inline blending,” using computers to measure and blend ethanol and conventional gasoline.  The blended gasoline is then transported for delivery to retailers.

Retailers conduct the second method, call “splash blending.”  Retailers purchase unblended gasoline and separately adds ethanol into the transportation vehicle.  The blending occurs trough the vehicle’s movement.

North Carolina’s Ethanol Blending Statute essentially prevents suppliers from selling pre-blended gasoline to retailers.  The statute, signed in 2008, requires suppliers to offer unblended gasoline for sale to retailers and prevents suppliers from contractually restricting retailers from splash blending.

In 2008, the plaintiffs, trade organizations representing gasoline suppliers, sued North Carolina in federal district court, arguing that the blending statute was preempted by federal law.  The plaintiffs relied on preemption by (1) the Petroleum Marketing Practices Act (PMPA)—which protects retailers from arbitrary or discriminatory terminations and nonrenewals of franchise agreement; (2) the federal renewable fuel program—which mandates the use of ethanol in gasoline; and (3) the Lanham Act—which establishes uniform regulation of trademarks.  U.S. District Judge Louise Flanagan rejected the suppliers’ arguments, and held that the federal statutes do not preempt the state blending statue.

The suppliers appealed, and the Fourth Circuit upheld the district court’s decision on the PMPA and the renewable fuels program.  But applicable to the efforts of this publication, the Fourth Circuit that a genuine issue of material fact existed as the whether splash blending interfered with the suppliers’ ability to control the quality of blended gasoline bearing their trademarks.  As the appeals court noted, “the Lanham . . . Act affords the trademark holder the right to control the quality of the goods manufactured and sold under its trademark.”  And it noted that the Lanham Act has as a purpose to “protect registered marks used in [interstate] commerce from interference by State . . . legislation.”

The Fourth Circuit found that as-applied to the suppliers, the Lanham Act would preempt the blending statute if the quality of gasoline produced by splash blending is less accurate than inline blending.  As the appeals court said, the suppliers “presented competent evidence that splash blending could result in an inferior quality product that could harm vehicle engines or performance thereby denigrating the value of the trademarked goods and fostering consumer confusion.  If, as a factual matter, inline blending is generally more accurate, or less likely to result in subquality blended gasoline, suppliers may have a legitimate Lanham Act claim.”

Under the Lanham Act, the suppliers have the right to protect their products from “significant negative impact.”  The appeals court remanded this issue to the district court to make factual findings to determine whether splash blending meets the suppliers’ quality standards for gasoline, and whether there are quality control measures  to mitigate risks with splash blending.  The Fourth Circuit further noted in conclusion that even if the court finds suppliers cannot not adequately control the quality of splash-blended gasoline, the Lanham Act would not preempt the blending statute in its entirety.  Rather, preemption would go to limiting North Carolina from requiring suppliers to allow the sale of splash-blended gasoline under their trademarks.

As to the contract and environmental statutes, the appeals court stated that Congress amended the PMPA in 1994, narrowing the preemptive scope and allowing states to enact laws that protect franchisees from unlawful termination of an agreement.  Further, the appeals court held that the blending statute does not conflict with provisions of the PMPA allowing franchisers to terminate a franchise agreement for “willful adulteration.”  Congress mandates ethanol blending, so the appeals court reasoned that practice could not be the definition of “willful adulteration” in the PMPA.

The appeals court also upheld the finding of non-preemption under the renewable fuels program, noting the program contemplates retailers as the parties blending ethanol.  Nothing under this program grant the suppliers a blending monopoly.

The Fourth Circuit’s decision in this case highlights the scope and reach of the Lanham Act, which seeks to ensure uniform application and protection of trademarks used in interstate commerce.

Copyrights / Infringement

Next Time, Buy the CDs
Sony BMG Music Entertainment  v. Tenenbaum
by Melissa Nott Davis

Following the lead of other courts addressing statutory penalties for illegal music downloading, the U.S. Court of Appeals for the First Circuit upheld a $675,000 fine for downloading and distributing 30 songs.  Sony BMG Music Entertainment  v. Tenenbaum, Case No. 12-2146 (1st Cir., June 25, 2013) (Howard, J.).

For over eight years, Tenenbaum ignored the warnings of his father, his college and the music industry and continued to download and distribute thousands of songs he knew were copyrighted.  In 2007 five record companies sued Tenenbaum under the Copyright Act for statutory damages and injunctive relief.  The record companies only pursued claims for 30 songs, though Tenenbaum admitted at trial he had distributed as many as 5,000 songs.  The trial court held as a matter of law that Tenenbaum had violated the Copyright Act and the jury found his violations were willful.  The jury awarded $22,500 for each of Tenenbaum’s thirty violations (15 percent of the statutory maximum), for a total award of $675,000.  The district court reduced the award to $67,500 finding that the jury’s award violated due process.  The First Circuit vacated the district court’s judgment holding that the principle of constitutional avoidance required the court to first address the issue of remittitur before determining the due process question.  On remand the district court determined remittitur was inappropriate and that the original $675,000 award comported with due process. Tenenbaum appealed the decision solely on due process grounds.

The Court reviewed two questions: what is the correct standard for evaluating the constitutionality of an award of statutory damages under the Copyright Act; and (b) did the $675,000 award violate Tenenbaum’s right to due process?

The 1st Circuit looked to St. Louis, I.M. & S. Ry. Co. v. Williams, not BMW of North America, Inc. v. Gore, as the proper standard for reviewing the constitutionality of statutory damages under the Copyright Act, noting that Gore applies to punitive damages and the concerns regarding fair notice to the parties of the range of possible awards were “simply not present in a statutory damages case where the statute itself provides notice of the scope of the potential award.”  Under Williams, a statutory damage award only violates due process “where the penalty prescribed is so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.”

The 1st Circuit examined the purpose of the Copyright Act’s statutory damages and Tenenbaum’s behavior to determine if $675,000 met Williams’ standard for constitutionality.  The 1st Circuit found that in 1999 Congress increased the Copyright Act’s minimum and maximum statutory awards specifically because of new technologies allowing illegal music downloading.  The record companies presented evidence that Tenenbaum’s activities had led to the loss of value of its copyrights and reduced its income and profits—precisely the harm Congress foresaw.  The Court went on to find that Tenenbaum’s conduct was egregious—he pirated thousands of songs for a number of years despite numerous warnings.  The Court held that “much of this behavior was exactly what Congress was trying to deter when it amended the Copyright Act.”  The 1st Circuit rejected Tenenbaum’s argument that the damages award had to be tied to the actual injury he caused, relying on Williams to find that the damages were imposed for a violation of the law and did not need to be proportional to the harm caused by the offender.

Copyright / Renewal

Ambiguity as to Copyright Renewal Term Must Be Litigated
Gary Friedrich Enterprises LLC, et al. v. Marvel Characters, Inc., et al.
by Ulrika E. Mattsson

The U.S. Court of Appeals for the Second Circuit reversed a lower court’s decision that dismissed a lawsuit brought by comic book artist Gary Friedrich, creator of the popular Ghost Rider character, concluding that Fredrich had no basis to bring a lawsuit contesting Marvel Enterprises ownership of the Ghost Rider copyright.  The court concluded that the district court erred in ruling that Marvel owned the copyright without conducting a trial.  Gary Friedrich Enterprises LLC, et al. v. Marvel Characters, Inc., et al., Case No. 12-0893 (2d Cir., June 11, 2013) (Chin, J.).

The comic Ghost Rider features a motorcycle-riding character with a flaming skull named Johnny Blaze, who gave his soul to the devil in return for his adoptive father being cured of cancer.  The plaintiff asserted that he conceived and wrote Ghost Rider and later agreed to publish the character through Magazine Management, which later became Marvel Entertainment.  According to the cover of the 1972 debut issue, the comic was conceived and written by the plaintiff.

An agreement covering the relationship between the plaintiff and the defendant was signed by both parties in 1978 and stated that the defendant was the owner of the copyright to the character’s original story.  The agreement also stated that plaintiff expressly granted to the defendant forever all rights of any kind and nature in and to the work.

The plaintiff filed a lawsuit in 2007, claiming he owned the renewal copyright to the Ghost Rider character.  The initial copyright term for Ghost Rider expired at the end of 2000, 28 years after the original publication in 1972.  By operation of law, the renewal copyright would have vested in the plaintiff, as the original author.  The plaintiff held the belief that the 1978 agreement only covered his future work and not the renewal copyright in his original work.  However, the defendant exploited the Ghost Rider character after 2000 by publishing reprints and new issues of the Ghost Rider comic series.  Marvel argued it could do so since it held the renewal copyright.

A district court ruled that the plaintiff had given up his rights to the Ghost Rider character, including the renewal of the copyright, by signing the 1978 agreement that stated that Marvel received the rights to the plaintiff’s work “forever,” which the district court found included the renewal term rights.  Friedrich appealed.

After considering the issue, the 2d Circuit reversed and remanded the case for further proceedings.  According to the court, “when interpreting a contract, the intention of the parties should control, and the best evidence of intent is the contract itself.“   The court further stated that “if the terms suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement, then the agreement is ambiguous and extrinsic evidence may be considered to determine the parties’ intent.”  Here, there were genuine disputes of material fact regarding the parties’ intent to assign renewal rights.  Therefore, the court concluded that the agreement is ambiguous and ordered the lower court to conduct a trial. 

Trade Secrets / Misappropriation

Course of Conduct Does Not Supplant Unambiguous Terms of an NDA
Convolve, Inc. v. Compaq Computer Corp.
by Charles J. Hawkins

Addressing the status of alleged trade secrets exchanged between parties to a non-disclosure agreement (NDA), the U.S. Court of Appeals for the Federal Circuit affirmed a summary judgment ruling, finding that the disclosing party’s failure to follow the written confidentiality obligations of the NDA caused the information to lose its status as a trade secret, if it ever had such status.  Convolve, Inc. v. Compaq Computer Corp., Case No. 12-1074 (Fed. Cir., July 1, 2013) (O’Malley, J.).

Convolve, Compaq and Seagate entered in NDAs in the context of negotiations to license Convolve’s technology relating to improved methods of manufacturing computer hard drives.  The parties had three meetings to discuss Convolve’s technology.  After the first meeting, the parties acknowledged in writing that any oral disclosure of confidential information during that meeting was covered by the NDAs.  Convolve, however, did not state in writing that any of the disclosures during or in connection with the latter two meetings were confidential.  The parties never reached a deal.

Later, Convolve and MIT sued Compaq and Seagate for, among other things, trade secret misappropriation and patent infringement.  Convolve contended that Seagate manufactured drives and tools that infringed two of its patents and misappropriated Convolve’s trade secrets stemming from information presented by Convolve to Seagate and Compaq.  Convolve also asserted that Compaq incorporated the Seagate drives into its computers, provided patent infringing tools and misappropriated certain trade secrets. 

The district court entered summary judgment in favor of Seagate and Compaq on the trade secret misappropriation allegations.  The district court also entered summary judgment in favor of Seagate and Compaq on all asserted claims of both patents.  Convolve appealed. 

As it relates to its trade secret claims, Convolve argued that the district court improperly granted summary judgment for three reasons: because it had presented evidence sufficient to create genuine issues of material fact that the trade secrets were disclosed in accordance with the NDA, because it presented evidence to support its argument that the parties’ course of conduct would demonstrate that the information should be protected and because the NDAs did not govern the entire relationship between the parties under California law.  The Federal Circuit rejected all three arguments.

The Federal Circuit found that as a consequence of Convolve’s failure to comply with the confidentiality obligations of the NDAs, the information presented at the latter two meetings lost any trade secret status it might have had upon disclosure.  The Court also rejected Convolve’s argument that the parties understood that all of their mutual disclosures were confidential, notwithstanding the marking requirements in the NDAs.  The Federal Circuit found that the plain language of the NDA unambiguously required that, for any oral or visual disclosures, Convolve was required to confirm in writing, within 20 days of the disclosure, that the information was confidential.   The Court concluded that the NDAs were not reasonably susceptible to Convolve’s interpretation, and that Convolve’s interpretation would have rendered the NDA “a dead letter.”

The Federal Circuit also rejected Convolve’s argument that the protection afforded to the exchange of information between the parties was broader than what was set forth in the terms of the NDAs.  The Court stated that a written NDA supplants any implied duty of confidentiality that may have existed between the parties.  The Federal Circuit found that this conclusion was consistent with California contract law and common sense.

Regarding the patent infringement allegations, the Federal Circuit reversed the lower court’s ruling of non-infringement of one of the patents, concluding that Convolve raised genuine issues of material fact precluding summary judgment on the issue of direct infringement, based on deposition testimony of fact and expert witnesses.  Since the Federal Circuit found that Convolve may be able to demonstration direct infringement by Seagate, it reversed the district court on inducement as well, concluding that Convolve presented enough evidence to preclude summary judgment on its inducement claims.

The Federal Circuit affirmed the lower court’s ruling on lack of enablement, noting the inventor’s testimony that he was unable to implement his own method on disk drives until almost nine years after the filing date of the patent.  The Court concluded that evidence was fatal as to enablement of the asserted method claims.

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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