[co-authors: Sofiya Andreyeva, Daniel Klaeren and Zach Kalinowski]
— Pinar Bailey and Olivia Stein
In Minerva v. Hologic, the Supreme Court recently upheld the patent-law doctrine of assignor estoppel—which bars the inventor assignor of a patent from denying the validity of their previously assigned patent—but the Court did rein the doctrine in. We assess the implications of Minerva and look at tools employers and other assignees have to strengthen assignor estoppel claims on their patents in light of the ruling.
— Ralph M. Pais and Sedina Alicic
We examine the European Union’s 2021 proposal for regulating artificial intelligence, including its broad definition of AI and a “high-risk” category that could ban certain technologies. Although these proposals could change significantly before being implemented and are likely several years off, we lay out steps companies can take now to prepare their products for regulation.
Message from Mars: The Drawbacks of Trade Secret Arbitration — Anthony M. Fares
Second Circuit: Trademark Agreements Restricting Keyword Advertising Are Not Anti-Competitive — Kimberly Culp and Sofiya Andreyeva
Copyright Office Releases Post-MMA Report on Unclaimed Royalties — Daniel Klaeren and Emily Bullis
How Will Arthrex Affect PTAB Outcomes? Likely, Not Much — Brian M. Hoffman and Zack Kalinowski
By Pinar Bailey and Olivia Stein
An inventor develops an invention, files a patent application and assigns the application for value to the company they founded. Later, the inventor founds another company and develops an improved version of their original invention. Then, the inventor’s former company sues the inventor or the inventor’s current company for patent infringement. In response, the inventor argues that the patent for the original invention is invalid. Should the inventor be able to do so? The U.S. Supreme Court’s decision in Minerva v. Hologic answers this question in part, but leaves several issues open for later resolution.
Csaba Truckai invented a device to treat abnormal uterine bleeding called the NovaSure System. He then filed a patent application and assigned his interest in the application, along with his interest in any continuation applications, to the company he founded, Novacept. Novacept later sold all its assets, including the NovaSure System patent, and the patent was eventually acquired by Hologic. Truckai went on to found Minerva Surgical and invented an improved device to treat abnormal uterine bleeding. The NovaSure System is “moisture permeable” and conducts fluid out of the uterine cavity during treatment. In contrast, Truckai’s new invention, the Minerva Endometrial Ablation System, is “moisture impermeable” and does not remove any fluid during treatment.
In response, Hologic filed a continuation application requesting to add claims to its patent. Hologic drafted one of the claims generally, to encompass both moisture permeable and moisture impermeable ablation devices. Then, Hologic sued Minerva for patent infringement in the U.S. District Court for the District of Delaware. Minerva asserted that the NovaSure System patent was invalid, and Hologic invoked the doctrine of assignor estoppel—which bars the inventor assignor of a patent from denying the validity of their previously assigned patent.
The District of Delaware held that assignor estoppel barred Minerva’s estoppel defense because Minerva was the alter-ego of Truckai, and the U.S. Court of Appeals for the Federal Circuit affirmed. The Supreme Court granted certiorari and reversed the lower courts.
The Majority’s Ruling—and Its Effect on Assignor Estoppel
Although Minerva argued for assignor estoppel to be eliminated entirely, the Supreme Court declined to do so. Instead, the Court defined assignor estoppel based on principles of fairness, which narrowed the doctrine. When an inventor applies for a patent, the inventor takes an oath asserting that they are the “original inventor” of the “claimed invention” and assumes a “duty of candor and good faith” in the patent process, including a “duty to disclose” to the U.S. Patent and Trademark Office all information they know “to be material to patentability.” If the assignee company sues for infringement and the inventor attempts to argue patent invalidity, the inventor is contradicting their earlier assurances that the invention was patentable.
In Minerva, the Court characterized the primary purpose of assignor estoppel as seeking to prevent this kind of inconsistency, but also noted that it supports a healthy marketplace of ideas. Allowing an inventor to raise an invalidity defense would allow the inventor to doubly profit by receiving the value of the assignment along with the continued right to use the invention it covers. Furthermore, patent assignments would chill because assignees would receive a less valuable product: a patent that is vulnerable to attack by its creator.
The Court differentiated the doctrine of assignor estoppel from the doctrine of licensee estoppel. Licensee estoppel bars a patent licensee from contesting the validity of a patent the licensee has paid to use. In Lear v. Atkins, the Court eliminated the doctrine of licensee estoppel because the doctrine failed to serve the same principles of fairness that upheld assignor estoppel. Unlike an assignor who assigns the patent to another, a licensee makes no assurances of patent validity when it purchases the right to use a patented device. If the patent is invalid, the licensee need not pay for the right to use the device. Thus, invalidating the doctrine of licensee estoppel and allowing licensees to challenge patents on the basis of invalidity serves “the important public interest in permitting full and free competition in the use of ideas.”
While the Court held that assignor estoppel should not suffer the same fate as licensee estoppel, it clarified that the doctrine should only extend as far as principles of fairness support. At the time of assignment, the doctrine implies that the assignor is vouching for the patent’s validity and should be estopped from claiming the patent is invalid. However, the assignor does not necessarily vouch for the patent’s validity as it is shaped by post-assignment developments.
The Court enumerated three scenarios for post-assignment developments where assignor estoppel would not apply:
Mixed Guidance for Entrepreneurs
Moving forward, entrepreneurs should feel more confident, but still rely on sound judgment and advice of counsel, when deciding whether to develop an improvement of a previously assigned patent.
Although the Court narrowed assignor estoppel, it did not eliminate the doctrine. In fact, aside from assignor estoppel, many such patent assignment deals may also contain non-compete provisions barring inventors from engaging in such activities. Minerva described the doctrine of assignor estoppel as one of good faith. Serial entrepreneurs who continuously assign patents for value and develop infringing improvements will not be relieved from all the constraints of assignor estoppel. On the other hand, an entrepreneur’s new venture should not hesitate to assert an invalidity defense if post-assignment changes are such that the inventor’s warranty would not be contradicted by an invalidity defense.
Additional notes on assignor estoppel to consider going forward:
The Supreme Court remanded Minerva v. Hologic to the Federal Circuit to determine whether Hologic’s new claim is materially broader than the ones drafted at the time Truckai assigned his rights. The Federal Circuit’s treatment of this case on remand will likely provide some guidance regarding whether the “materially broader” requirement will be a strenuous or relaxed standard for inventors to meet.
One issue that the Supreme Court left undisturbed was the doctrine of privity. An inventor may be constrained from arguing invalidity due to assignor estoppel, but an inventor’s company is not constrained from arguing invalidity unless the inventor and the company are in privity. On appeal to the Federal Circuit, Minerva did not contest the district court’s finding that itself and Truckai were in privity, which extends the assignor estoppel that attached to Truckai to Minerva.
Courts balance the equities in privity determinations. Status as the founder of a company generally carries a great weight on the determining whether privity exists between the inventor and her venture for purposes of assignor estoppel. However, in light of increased employee mobility and the presence of alternatives to the traditional hierarchical system in the technology industry, whether the doctrine of privity will apply to an individual inventor and their new venture is uncertain. In general, the closer the relationship between the inventor and the company accused of infringement, the more likely the equities will favor determining the company and the inventor are in privity. Where the inventor exercised substantial control over and/or held considerable financial interest in, the defendant corporation, courts were more likely to find a privity relationship extending the application of assignor estoppel to the defendant corporation.
Also, the relationship between the inventor and the defendant corporation need not be formal. For example, the title of the employee is not dispositive in this analysis. The inventor in Acushnet v. Dunlop Maxfli Sports was not found to be in privity with his employer despite having the title of “Vice President of Research and Development,” while one of the inventors in Juniper Networks v. Palo Alto Networks was found to be in privity with his employer despite his testimony that he was “not a title person” and was not listed as the founder of the company.
At bottom, what is dispositive for a determination of privity is what the employee does for the company. Key employees of the defendant company are likely to satisfy the privity test. It is also significant whether the accused company availed itself of the inventor’s knowledge and assistance to conduct the infringement, but not necessarily through the inventor’s design of the infringing features. And the inventor’s inability to control the defendant corporation is not dispositive for the privity analysis.
Best Practices for Employers in Light of Minerva
In Minerva, the Supreme Court held that Truckai’s patent assignment, which assigned rights to his patent application as well as continuation applications that claim the benefit of priority to his application, did not necessarily bar him from asserting a defense of invalidity. Assuming that the new claim was materially broader than the original patent claims, Truckai could have not necessarily foreseen the change when signing his patent application. The Court did not explain what kind of agreements employers could implement to successfully to bar inventors from later raising an invalidity defense, however.
Employers and other assignees may have a range of tools to strengthen assignor estoppel claims on their patents, ranging from obtaining additional oaths and declarations upon inventor’s review of allowed claims, confirmatory assignments which may include warranty provisions for additional consideration, well-compensated patent bonus programs, as well as contractual restrictions, where appropriate.
By Ralph M. Pais and Sedina Alicic
In April 2018, as companies scrambled to come into compliance with the European Union’s General Data Protection Regulation that was soon to become enforceable, the EU quietly announced its intention to craft another massive regulatory mandate—this time in the field of artificial intelligence. As with GDPR, the EU sees itself as having a duty to protect its citizens from what it perceives as “risky” technologies, whether deployed by governments or companies, that could infringe on the fundamental rights of its citizens.
Though the EU’s efforts to develop rules around AI started with a whimper, the bang came in April 2021, when a proposed regulation was finally released. Tech insiders proclaimed the death of innovation—and industry groups and law firm blogs sounded the alarm that the proposed regulatory scheme would create a new, enormous and costly regulatory body to oversee these issues, further stifling innovation. On the other hand, regulators lamented that the proposal did not go far enough in protecting citizens. Regardless of which perspective is correct, for the reasons detailed below, the proposed regulations should matter to every company that develops software, not just those who call their product AI.
AI, Broadly Defined
In an effort to be future-proof, the proposed regulation includes an extremely broad definition of AI: “[S]oftware that is developed with one or more of the techniques and approaches listed … and can, for a given set of human-defined objectives, generate outputs such as content, predictions, recommendations, or decisions influencing the environments they interact with.” Though the listed techniques include things normally classified as AI, such as supervised, unsupervised and reinforcement learning, they also include more common methods such as Bayesian estimation and search and optimization methods that are not usually thought of as exclusive to the AI realm. It also does not matter if these techniques are simply used as a component of a much larger system—they still fall under the regulation.
Therefore, any company that develops software needs to look carefully at its codebase to see whether it contains any of these techniques and approaches, as well as its products, to see if regulators may suspect that it does based on the software’s performance. In modern software packages, where recommendation engines, personalized experiences and automated processes are the norm, it may be impossible to think of a software package that does not contain at least one “AI” algorithm. Furthermore, the proposed regulations also cover users of AI in the European Economic Area, so they would apply to non-tech companies, such as retailers who deploy chat bots to assist their customers and advertisers who use targeting software.
Based on the GDPR process, we are some years away from final regulations being agreed or implemented. It is impossible to predict at this stage how much of the specifics of the current regulatory formulation will survive the process that lies ahead. However, looking at and understanding the general conceptual approach the EU has taken gives us a reasonable idea of what regulators are concerned about and where potential landmines may be placed.
The EU’s Risk-Based Approach to Regulating AI
The proposed regulation takes a risk-based approach to determine how to treat various AI applications. However, AI used only as a safety component of a larger product will still be governed under the existing product integrity regime.
The first is AI that deploys subliminal techniques to materially distort behavior in a manner that causes a person physical or psychological harm, exploits vulnerabilities of a specific group or is used for social scoring. This category seems far more inspired by movies and TV shows than what is likely in real life, with the only example provided for it being “toys using voice assistance encouraging dangerous behaviour of minors.” However, the vague definition of this category is cause for concern, as it could potentially be stretched to cover a broad range of activities, particularly involving advertising.
Second, law enforcement’s use of real-time remote biometric identification systems, such as facial recognition technologies used for identification purposes in publicly accessible spaces, would be prohibited, with certain exceptions. This provision seems to be an effort to answer public concern regarding police surveillance, particularly in regard to the recent Black Lives Matter demonstrations. Due to the exceptions, both regulators and the public have called the current proposal’s measures on this front too lax, so it seems possible that the eventual regulation will only increase the level of scrutiny applied to these technologies. Companies working on such systems will want to follow the development of this regulatory regime closely or consider alternative uses of or customers for their technology.
These cover a broad range of applications, including remote biometric identification, management and operation of critical infrastructure, determining access to or assessing students in education and vocational training, employee recruitment and monitoring, and access to essential private services and public services and benefits.
Here, the EU seems to be concerned about fairness, aiming at ensuring resources and opportunities are not allocated or denied to people arbitrarily or based on protected characteristics. In particular, given the widespread and ever-increasing use of algorithms in screening and assessing job candidates, companies that use or provide software used in making employment decisions or recommendations may want to take measures now to check for and reduce any unintended biases. In addition, this category covers the use or provision of credit scoring systems, another widespread application.
Action Items for Companies with Potentially “High-Risk” Software
What should a company do if it suspects its software might be interpreted as high risk? At the very least: be aware and pay attention. Depending on possible impact on a business, getting involved in the process may be prudent. Judging by the timeline of GDPR, which took four years to move from a draft proposal to adoption, implementation is years away. Given the many stakeholders that will seek to influence the proposed regulation, it is likely that the final regulation will look substantially different than what the EU has released this far. Nevertheless, it is unlikely that the EU will abandon this regulatory initiative. Many technologies and products could be impacted by whatever final regulations the EU ultimately adopts.
It should be noted that there are some industry best practices that have the potential to both improve a company’s products and ready those products for regulation, particularly in the realm of data governance. For maximum impact, companies can put checks into place to ensure the quality of their data sets, including that the variables they are using are relevant, their set is representative, and their data is free of errors. In doing so, companies should consider the demographics of their target market and the intended use for their AI systems to ensure they have the right data.
By actively examining their data for possible biases and identifying gaps in their data sets, companies can be better prepared to meet the requirements of any regulation that does come out of the EU and better understand their internal processes to determine how best to comply when the time does come to do so.
By Anthony M. Fares
On July 6, 2021, a federal court ordered that Mars, Inc.’s trade secret lawsuit against its former executive must be resolved in arbitration. Mars v. Szarzynski is a cautionary example of broad judicial interpretation of arbitration provisions and illustrates why arbitrating trade secret claims can be undesirable.
In this case, Mars accused its former executive, Jacek Szarzynski, of violating the Defend Trade Secrets Act by providing thousands of confidential documents to his future employer. The defendant brought a motion to dismiss, arguing that his employment agreement required all such claims to be brought in arbitration. Even though Szarzynski’s contract was with Mars Belgium, a subsidiary of Mars, Inc., the court found that Mars, Inc. was a third-party beneficiary to the agreement—and thus bound by its terms—because it consciously participated in and accepted the benefits of the agreement. The court also rejected Mars’ arguments that subsequent incentive agreements with Szarzynski demonstrated the parties’ intent to avoid arbitration. These agreements did not govern his day-to-day employment at Mars and only provided Mars the right to seek judicial intervention in certain circumstances—not including misappropriation of trade secrets.
Although many employment agreements include arbitration provisions to quickly and cost-effectively resolve claims brought by former employees, employers may be at a disadvantage when bringing an action for trade secret misappropriation subject to these provisions:
In light of the Mars decision, companies seeking to protect their trade secrets may wish to revise their employment agreements—including any subsidiary’s employment agreements—to exempt trade secret claims from arbitration. Companies that nonetheless find the privacy and economy of arbitration desirable may instead wish to modify these agreements by taking three steps: 1) designating a well-developed jurisdiction for trade secret claims, 2) building in an appeal process, and 3) requiring a full arbitration hearing on any such claims.
By Kimberly Culp and Sofiya Andreyeva
In a recent decision, the U.S. Court of Appeals for the Second Circuit clarified the legal standing of trademark settlement agreements and upheld agreements prohibiting a competitor’s use of a trademarked term in keyword search advertising. On June 11, 2021, the Second Circuit reversed the Federal Trade Commission’s Final Order that 1-800 Contact’s entry into and enforcement of trademark settlement agreements (Agreements) violated Section 5 of the FTC Act, 15 U.S.C. § 45. The Agreements, in relevant part: (1) prohibited parties from bidding on each other’s trademarked terms as keywords on online advertising search engines auctions, and (2) required parties to purchase negative keywords to prevent ads from appearing when consumers searched a trademarked term specified in the agreement.
The Second Circuit’s reversal creates a more favorable legal landscape, both for trademark rightsholders seeking to settle disputes by entering into trademark agreements and the parties interested in enforcing them.
In 2016, the FTC challenged the Agreements, alleging they unreasonably restrained truthful, non-misleading advertising and price competition in search engine auctions. An FTC administrative law judge determined the Agreements violated Section 5. 1-800 Contacts appealed to the full FTC, which affirmed the judge’s decision. 1-800 Contacts then appealed the FTC’s Final Order to the Second Circuit.
The Second Circuit rejected the FTC’s antitrust analysis. The court first agreed with the FTC that intellectual property rights are not complete shields to antitrust liability and reasoned that trademark settlement agreements, therefore, cannot categorically escape antitrust scrutiny. However, the court faulted the FTC’s application of the “inherently suspect” or “quick look” analysis and found the Agreements were “not so obviously anticompetitive to consumers” and that trademark settlement agreements, categorically, have “not been widely condemned in [the court’s] judicial experience.”
The Second Circuit then applied a rule of reason analysis and determined there was insufficient evidence of anticompetitive harm. The court also concluded the Agreements had “cognizable procompetitive justifications” and emphasized that trademark agreements should be presumed procompetitive because they “are favored in the law as a means by which parties agree to market products in a way that reduces the likelihood of consumer confusion and avoids time-consuming litigation.”
Although most trademark agreements with procompetitive justifications, including those with keyword search restrictions, will not implicate antitrust concerns, the Second Circuit’s opinion is not an absolute green light. The court cautioned that not every trademark agreement has a valid procompetitive justification. Antitrust liability may still result when the “provisions relating to trademark are auxiliary to an underlying illegal agreement between competitors.”
As a result of the opinion, junior rights holders could see an uptick in requests to place limitations on their keyword advertising as part of the resolution of trademark disputes. While courts are likely to be deferential in future cases involving similar agreements, antitrust liability involves a fact-intensive inquiry. Companies seeking to protect their trademark rights by restricting their competitors’ uses of trademarked terms should consider not just the trademark issues, but also whether any anticompetitive concerns might arise from such agreements.
By Daniel Klaeren and Emily Bullis
On July 8, 2021, the U.S. Copyright Office released a public report, Unclaimed Royalties: Best Practice Recommendations for the Mechanical Licensing Collective, as required by the Music Modernization Act (MMA). The passage of the MMA in 2018 created the Mechanical Licensing Collective (MLC), a nonprofit governing agency tasked with establishing blanket royalty rates, collecting royalties under a mechanical license and distributing royalties to copyright owners when their works are streamed by Digital Service Providers (DSPs).
While a copyright owner has exclusive rights to reproduction and distribution under 17 U.S.C. §§ 106 (1) and (3), these rights are subject to compulsory licensing requirements under 17 U.S.C. § 115. A compulsory mechanical license allows any party to reproduce and distribute nondramatic musical works by simply paying a set license fee determined by statute. Unlike most other intellectual property licenses, the compulsory mechanical license does not require the permission of the copyright owner.
The bulk of the Copyright Office’s new report focuses on recommendations for reducing the incidence of unclaimed accrued royalties—those royalties that have been collected by the MLC but remain unmatched with the proper copyright owners. For context, the MLC completed its first monthly royalty distribution in April of this year (for works streamed in January 2021), with approximately 80 percent of the royalty pool successfully matched to musical works registered in the MLC public database. To reduce the incidence of unclaimed accrued royalties, the Copyright Office recommends a robust educational campaign publicizing the existence of the MMA, the MLC, the blanket license and the public musical works database. The Office’s report also outlines steps to ensure that the MLC’s online claiming portal will allow copyright owners to easily register with the MLC, review data about their works, identify potential errors and claim unmatched usage. Other topics include technical operational recommendations for data quality, matching practices and transparency.
Notably, the Copyright Office recommends that the MLC schedule the first distribution of unclaimed accrued royalties beyond the statutory minimum of three years, withholding the first distribution “for at least five years from the date that the ability to claim in the portal is made available to the public.” The Office reasons that it will take more than three years to make the online database and online claiming portal operational, and to educate music stakeholders sufficiently. Noting that the MLC should value accuracy over expediency, the report states that, “if the MLC is going to err, it should err on the side of holding unclaimed royalties longer.” The Office’s recommended timeline is relevant because the MLC is required under the MMA to “carefully consider, and give substantial weight to, the Office’s recommendations when establishing procedures related to these issues.”
Looking to SoundExchange as a historical example, it may be difficult for the MLC to achieve a distribution of unclaimed accrued royalties on even a five-year time scale. SoundExchange is an organization that operates a musical repository of approximately 30 million sound recordings, all sourced from copyright owners, and was one of the organizations consulted in the course of the Copyright Office’s study. According to SoundExchange, the organization “waited about 10 years” before distributing unmatched royalties. The recent successful distribution of matched royalties, however, offers hope that the new system of mechanical licensing established by the MMA will provide a working solution to streaming services and music industry stakeholders alike.
By Brian M. Hoffman and Zack Kalinowski
The U.S. Supreme Court’s opinion in United States v. Arthrex has shaken up the Patent Trial and Appeals Board but will likely have little effect on case outcomes. Arthrex involved a challenge to the constitutionality of the PTAB’s administrative patent judges. APJs are appointed by the Secretary of Commerce and can be removed only for cause. The APJs conduct inter partes review (IPR), a procedure for challenging a patent’s validity. A dissatisfied party to an IPR can appeal an APJ panel’s final written decision to the Federal Circuit or request rehearing by the PTAB. Critically, before Arthrex, 35 U.S.C. § 6(c) prevented the Director of the U.S. Patent and Trademark Office from rehearing PTAB decisions.
The Court found it troubling that the IPR regime allowed APJs to exercise “significant authority” in determining the validity of a patent without supervision from a higher executive officer. The Appointments Clause of the U.S. Constitution requires principal officers to be appointed by the President; inferior officers may be appointed by an executive department head. The Court noted that inferior officers are supervised by a superior and that the PTO Director supervised APJs extensively except regarding final IPR decisions. Rather than determining whether APJs are inferior or principal officers, the Court made this distinction moot by holding 35 U.S.C. § 6(c) unenforceable insofar as it prevents the Director from granting rehearing. The Court thus remedied the constitutional infirmity without upsetting the overall IPR framework.
The PTO has established interim procedures that implement Arthrex by granting the Director the power to rehear the PTAB’s final written decisions. Director rehearing can be initiated two ways—either “sua sponte by the Director” or by request of a party to the PTAB action. A party seeking rehearing by the Director must enter a “Request for Rehearing by the Director” into the PTAB’s electronic filing system and notify the Director’s office by emailing Director_PTABDecision_Review@uspto.gov. A request is reviewed by an advisory panel of PTO business group members before the Director makes their decision on whether to grant rehearing.
Note that Director rehearing is not available for IPR institution decisions. The Court found that the Director sufficiently supervises the institution of IPR. Thus, a party dissatisfied with an APJ panel’s institution decision can only request a PTAB rehearing.
Again, Arthrex is unlikely to have much effect on IPR outcomes. Requesting rehearing of a final written decision was uncommon before Arthrex, and there is no reason to believe such requests will become more common after Arthrex. Those seeking a rehearing will face an uphill climb to convince the Director to rehear their case. Practically speaking, the Director has little incentive to overturn an APJ panel for a typical IPR. Perhaps the Director would grant rehearing to promulgate policy changes or address considerations typically beyond the purview of an APJ panel. Nevertheless, the reality is that a party on the losing side of a PTAB final written decision will likely find an appeal to the Federal Circuit to be a more effective route for making its case.