Fine for False Marking: Per offense = $$ Per Article

False marking gained a bit of publicity this year with a number of qui tam suits being filed against companies who allegedly violated 35 U.S.C. 292 by marking products with expired patents. (See e.g., Public Patent Foundation, Inc v. Cumberland Packing Corp, 09-cv-04360. S.D.N.Y.; Perquignot v. Solo Cup Co., 07 cv 897, E.D.Va.).

The elements of a false marking claim are fairly straight forward: (1) marking an unpatented article with the word “patent” or other indication that the article is patented and (2) intent to deceive the public. Under Section 292, the penalty for false marking is that the party “shall be fined not more than $500 for every such offense.” Section 292 also includes a qui tam provision that provides that “any person may sue for the penalty, in which event one-half shall to the person suing and the other to the use of the United States.” What was unclear, until now, was whether “every such offense” was to be applied on a per article basis or as a single fine for a continuous act of marking. The difference is clearly huge. Would a defendant such as Cumberland Packing Corp. be facing a single fine of up to $500 or facing this fine for each and every one of the billions of packets of Sweet n’ Low that it sold?

In The Forest Group, Inc. v. Bon Tool Company, 2009-1044, the Federal Circuit resolved the debate and held that “per offense” means per article marked, and not a single fine for continuous false marking. In tempering this holding somewhat, the Federal Circuit noted the statute requires a fine of “not more than $500” and “by allowing a range of penalties, the statute provides district courts the discretion to strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities. In the case of inexpensive mass-produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty.”

Even with the guidance provided that would support fines of only “a fraction of a penny per article,” the holding in the Forest Group may still create an incentive for more qui tam actions being brought for false marking. After all, even a fraction of a penny applied to a billion items can still amount to millions of dollars in potential recovery. With the new year approaching, and new guidance from the Federal Circuit that may invigorate a new class of litigation prospectors, the time is right to review your patent marking and clean up any marking that may no longer be applicable.

Reflections On The Erosion of Method Claims

It wasn’t that long ago that patent practitioners held the view that means-plus-function claims were the broadest and best way to protect an invention. Over time, many learned (the hard way) that this isn’t true anymore. With means-plus-function claims being construed narrowly in view of the specification, it became increasingly popular to include method claims to cover the process taking place in the described apparatus. After all, what could be better than not being limited by any structural limitations? Well, as it turns out, the last couple of years have not been particularly kind to method claims.

Patentable Subject Matter:

Today the Supreme Court is hearing oral argument in Bilsky, a case that many feel will significantly redefine the scope of patentable subject matter for method claims. (And providing motivation for today's musings.) Bilsky is the culmination of at least a two year trend at the Federal Circuit where 35 U.S.C. 101 has been increasingly applied as the basis for denying patent protection for claims directed to methods. The Federal Circuit's now infamous “machine or transformation test,” set forth in Bilsky represents a considerable narrowing of patentable subject matter for methods. Clearly, those post-State Street feel good days for business method patents are behind us for the moment. But, Bilsky and Section 101 is a subject all its own (and the subject to countless other posts and articles), so lets move on to some other issues.

Infringement of Method Claims

Divided Infringement:
Last year, in Muni-Auction v. Thomas, 532 F. 3d 1318 (Fed Cir. 2008) the Federal Circuit addressed the issue of infringement of a method claim when two or more entities were required to act in order to perform all of the steps of a claimed method. In the patent in dispute in Muni-Auction “at least the inputting step of claim 1 is completed by the bidder, whereas at least a majority of the remaining steps are performed by the auctioner’s system.” Id. at 1328. In finding that there was no direct infringement (and therefore no predicate for third party liability based on inducement or contributory infringement) the Federal Circuit looked to the relationship between the bidder and the auctioner. The court held that:

Accordingly, where the actions of multiple parties combine to perform every step of a claimed method, the claim is directly infringed only if one party exercises “control or direction” over the entire process such that every step is attributable to the controlling party, i.e., the “mastermind.” [Citation omitted] At the other end of this multi-party spectrum, mere “arms-length cooperation” will not give rise to direct infringement by any party.

* * *
Under BMC Resources, the control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method.

Although the holding in Muni-Auction is consistent with earlier cases on the issue of divided infringement, such as BMC Resources v. Paymentech, L.P., 498 F.3d. 1373 (Fed. Cir. 2007), this decision seems to raise the bar regarding the nature of the relationship required in order to find liability under a “divided infringement” theory. Under Muni-Auction, to establish infringement of a method claim under a divided infringement theory, one must not only show that the entities involved perform all of the steps within the scope of the claim, but must also establish a close legal relationship among those entities.

Steps performed Abroad:

In August, an en banc Federal Circuit addressed whether a method claim could be infringed under 35 U.S.C. 271(f). The Court held that “because one cannot supply the step of a method, Section 271(f) cannot apply to method or process patents.” Cardiac Pacemakers v. St. Jude Medical, 2007-1296 (Fed. Cir., August 19, 2009). The court further held that “271(f) does not encompass devices that may be used to practice a patented method.” Id. at 30. Thus, a device built in the United States that is capable of performing a patented method, but does not actually perform that method in the United States, does not infringe a claim to the patented method under 35 U.S.C. 271(a) or (f). Again, without direct infringement, there is no basis for assertions of third party liability based on threats of inducement or contributory infringement.

Going back a few years, in NTP v. Research in Motion, the Federal Circuit held that “a process cannot be used ‘within’ the United States as required by section 271(a) unless each of the steps if performed within this country.” 418 F.3d 1282, 1318 (Fed. Cir. 2005)(en banc)(emphasis added). In contrast, the Court also held that “use of a claimed system under section 271(a) is the place at which the system as a whole is put into service, i.e., the place where control of the system is exercised and beneficial use of the system obtained.” Id. at 1317 (emphasis added). Unlike the method claim, for the system claim, the Federal Circuit upheld the finding of infringement even though one component of the claimed system was not present in the United States.

Conclusion

Whether the Supreme Court limits or expands the scope of patentable subject matter in Bilsky, it is apparent that the scope of method claims have already been limited. For those who thought (or just hoped) that method claims were the next best thing since means-plus-function claims…well, just like with means-plus-function claims, this was a good theory put to rest by subsequent case law. Its now time to adapt again.


Common Sense Practice Note: Things that today are considered "conventional wisdom" may not always have been considered "conventional" in the past, and may not always be considered "wisdom" in the future. For patent practitioners, the best strategy remains timeless - keep applying for claims of varying format, varying subject matter and varying scope, since one never knows what tomorrow may bring.

The 5 W’s (and How) – Not Just for Journalism Anymore

The Federal Circuit Heightens the Pleading Requirement for Inequitable Conduct

Sometime during grade school we learned that good journalistic writing needed to address “the five Ws”- who, what, when, where and why – and sometimes how. This is still true for good journalism. It is now also true for pleading the defense of inequitable conduct.

In Excergen Corp. v. Wal-Mart Stores, Inc. et al. the Federal Circuit recently addressed the requirements for pleading inequitable conduct under the heightened specificity requirements of Fed. R. Civ. P. 9(b). (2006-1491, 2007-1180, August 4, 2009, http://www.cafc.uscourts.gov/opinions/06-1491.pdf). The two elements of inequitable conduct are that (1) an actor within the duty of candor committed a material omission or made a materially false statement to the patent office, and (2) the omission or false statement was made with the specific intent to deceive the patent office. With respect to the first element, materiality, the Excergen court held “that in pleading inequitable conduct in patent cases, Rule 9(b) requires identification of the specific who, what, when, where and how of the material misrepresentation or omission committed before the PTO.” In addition, the Excergen court held that “a pleading of inequitable conduct under Rule 9(b), must include sufficient allegations of underlying facts from which a court may reasonably infer that a specific individual (1) knew of the withheld material information or of the falsity of the material misrepresentation , and (2) withheld or misrepresented this information with a specific intent to deceive the PTO” (emphasis added).

Under this heightened pleading standard, a general allegation against all individuals within the scope of the duty of candor, such as “Excergen, its agents and/or attorneys,” fails to address the “who” element with sufficient specificity and was deemed inadequate. In short, the court wants names (but also noted that these may be redacted from the public filing, if appropriate). For the “what” and “where” requirements, the pleading must now specifically identify not just a withheld reference, but those specific portions of the withheld reference that are considered material. General averments of “materiality” or that a reference is “not cumulative to the information already of record,” are insufficient. For materiality, the pleading now must “identify the particular claims limitations, or combination of claim limitations, that are supposedly absent from the information of record.” This, the court says, is “necessary to explain both ‘why’ the withheld information is material and not cumulative, and ‘how’ an examiner would have used this information in assessing the patentability of the claims.” Finally, the pleading must allege that the specific individual(s) identified “knew of [the] specific information that is alleged to be material [to the asserted patent] and then decided to deliberately withhold it from the relevant examiner.”

It is not news that inequitable conduct is a defense that requires pleading with specificity. Nonetheless, the heightened pleading requirements outlined in Excergen that provide a framework for meeting this requirement will be welcomed by many who view inequitable conduct as a defense that is raised too often, too early, and many times too vaguely. In practice, however, rather than significantly limiting the number of inequitable conduct allegations being made, Excergen is more likely to impact the timing and scope of these allegations. To address the five W’s (and “how”), defendants will require additional fact discovery before filing the amended pleading with the inequitable conduct defense. The allegations will still come, they will likely come later in the case and should be more thoroughly defined.

The Federal Circuit Reviews the Standard for Preliminary Injunctions in Design Patent Cases

Titan Tire Corporation et al. v. Case New Holland Inc., et al. 2008-1078

In Titan Tire, the Federal Circuit affirmed the trial court’s denial of a preliminary injunction (“PI”) in a design patent case. (www.cafc.uscourts.gov/opinions/08-1078.pdf) The opinion begins with a recitation of the four factors required to obtain a preliminary injunction which “are of longstanding and universal applicability.” That is, the movant “must establish [1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Although a movant must satisfy all four factors in every case, the focus of Titan Tire was on the first factor. More particularly, the opinion provides an in-depth discussion regarding the respective evidentiary and procedural burdens for establishing (or defeating) a showing that a patent holder “is likely to succeed on the merits” in the face of a validity challenge to the asserted patent. Although Titan Tire is a design patent case, the discussion with respect to the burdens encountered in a PI motion are equally applicable to utility cases as well.

The court begins its analysis with the truism that “the patentee seeking a preliminary injunction in a patent infringement suit must show that it will likely prove infringement, and that it will likely withstand challenges, if any, to the validity of the patent.” When an alleged infringer is challenging patent validity in its defense of a PI, “the burden is on the challenger to come forward with evidence of invalidity, just as it would be at trial.” (Well, almost “as it would be at trial.” As discussed below, the accused infringer does not need to present “clear and convincing” evidence of invalidity to defeat a motion for a preliminary injunction.) After the accused infringer presents some evidence sufficient “to persuade the trial court that the patent is invalid, at this stage it is the patentee, the movant, who must persuade the court that, despite the challenge presented to validity, the patentee nevertheless is likely to succeed at trial on the validity issue.” In this context, “[w]hile it is not the patentee’s burden to prove validity, the patentee must show that the alleged infringer’s defense lacks substantial merit.”

How much evidence does an accused infringer need to present for a successful invalidity challenge during a preliminary injunction hearing? Clearly, the accused infringer needs to come forward with enough evidence (something more than a “mere scintilla”) to persuade the court that its invalidity defense has “substantial merit.” The court unequivocally stated, however, that “the alleged infringer at the preliminary injunction stage does not need to prove invalidity by the ‘clear and convincing’ standard that will be imposed at trial on the merits.” Instead, this heightened evidentiary burden is merely “a consideration for the judge to take into account in assessing the challenger’s case at the preliminary injunction stage.”

Obviousness of Design Patents

After discussing the standard for determining whether an invalidity defense is sufficient to defeat a PI motion, the court continued with a discussion of the standard for determining invalidity of a design patent.

Obviousness for design patents, like utility patents, is governed by 35 U.S.C. 103. When combining multiple references for an obviousness defense, the inquiry is “whether one of ordinary skill would have combined the teachings of the prior art to create the same overall visual appearance as the claimed design.” As discussed in Titan Tire, this typically involves identifying a “primary reference;” that is “something in existence, the design characteristics of which are basically the same as the claimed design.” Then, “other ‘secondary’ references ‘may be used to modify it to create a design that has the same overall visual appearance as the claimed design.’” Finally, to properly combine the references, the "secondary references must be 'so related [to the primary reference] that the appearance of certain ornamental features in one would suggest the application of those features to the other.'" Citations omitted. After reviewing this standard, the court reviewed the prior art of record and affirmed the district court’s holding that the accused infringer's invalidity defense had sufficient merit to defeat the PI.

Although dicta, the court pointed out that current test for obviousness of design patents may have similar flaws as the “point of novelty” test for infringement that was eliminated by the Federal Circuit's en banc decision is Egyptian Goddess. The court did not, however, take the opportunity to take on this issue. Instead, it simply pointed out that gyptian Goddess expressly states that “it is not a test for determining invalidity, but is designed solely as a test of infringement.” After noting this limitation, the Titan Tire court simply warns that “it is not clear to what extent, if any, the doctrine applicable to obviousness should be modified to conform to the approach adopted by this court in Egyptian Goddess.”

Another interesting, but unanswered question, is the role of the Supreme Court’s decision in KSR in determining obviousness in the context of design patents. In particular, Titan Tire objected to the trial court’s reference to the passage in KSR that the “predictable use of prior art elements according to their established functions” would be indicative of obviousness since, it argued, design patents do not have functional elements. The Federal Circuit stated that “it is not obvious that the Supreme Court necessarily intended to exclude design patents from the reach of KSR,” but found that this question need not be resolved to dispose of the present case.

What are the take aways from Titan Tire?

• Preliminary injunctions represent extraordinary relief and are difficult to obtain. (Of course, we new that already). The Federal Circuit’s discussion in Titan Tire is likely to make it easier to defeat a PI motion based on a reasonably presented invalidity defense.
  
• The ordinary observer test of Egyptian Goddess does not have any bearing on the validity of design patents. The rational behind eliminating the “point of novelty” test, however, may continue to influence the validity inquiry in the future.
  
• We should expect to see KSR-based arguments raised more often in the context of design patents.

En Banc Decision Clarifies Scope of Product-By-Process Claims and Highlights Philosophical Divide in the Federal Circuit

En banc decisions from the Federal Circuit are rare. They serve to clarify the law, typically being invoked when conflicting precedent has been identified and needs to be reconciled. As such, en banc decisions are important. On May 18, 2009, the Federal Circuit issued its decision in Abbott Laboratories et al. v. Sandoz et al., 2007-1400, 1446 (http://www.cafc.uscourts.gov/opinions/07-1400.pdf). Most of the decision was panel-only. However, the Court, acting sua sponte, took on one issue en banc. That issue was the “proper interpretation of product-by-process claims.”

The Majority Holding

First, the law. The majority noted conflicting precedent from Federal Circuit panel decision regarding whether the process recitations in a product-by-process claims were properly construed as claim limitations. In other words, would an identical product, made by a different process, infringe a product-by-process claim? Making a long story short, the majority held that process recitations in a product-by-process claim are indeed claim limitations and if a product is made by a different process, there is no infringement.

Judge Newman’s Dissent

Judge Newman’s dissenting opinion, joined by J. Laurie and J. Mayer, is a 38 page dissertation taking issue with both the process used by the Federal Circuit in dealing with this issue en banc, and the substance of the majority’s holding.

Judge Newman is perhaps the Federal Circuit’s most consistent supporter of a strong patent system. Her opinions demonstrate a high level of respect both for patents and the patent bar. This dissent is fully consistent with these values.

First, the dissent is clearly unhappy with the perceived short-cutting of the en banc process in this case. For example, Judge Newman notes that the parties were not invited to brief or argue the en banc question and neither were amici. The dissenting opinion states that the Federal Circuit ran afoul of Fed. R. App. Proc. 34 and 35, as well as its own internal operating procedures, in taking on this issue without seeking such input. In Judge Newman’s view, those constituents likely to be effected by this change in the law should have been provided an opportunity to be heard.

Turning to the substance of the dissent, Judge Newman methodically dissects each case relied on by the majority and effectively points out why those cases fail to support the bright line test adopted by the majority. Rather, long standing authority, she points out, supports evaluating a product-by-process claim under a “rule of necessity” that traditionally allowed a patentee to claim the product by describing the process of manufacture when there was no known way of characterizing an otherwise novel product. Since both patentability and infringement were measured by the scope of the product, Judge Newman characterizes this approach as “pragmatic, fair, and just, for it attuned patent law and practice to the realities of invention.”

Practical Impact

From a practical standpoint, this decision will have limited impact since the use of product-by-process claims tend to be rare. (Indeed, its not even clear that they were appropriate in the case before the court since there were other claims involved that claimed the product based on measurable properties, rather than the process steps used to make the product). Nonetheless, the majority holding seems to present yet another small, but measurable, erosion of patent rights that are now available to inventors.

Federal Circuit Decides that “Have Made” Rights are Implied, Unless Expressly Omitted

When a patent license grants the rights to “make, use and sell” a patented product, and reserves “all rights not expressly granted to [a licensee],” does the licensee have the right to have the licensed product made by another on its behalf? That question was answered in Corebrace LLC v. Star Seismic LCC, Fed. Cir. 2008-1502 (May 22, 2009)(www.cafc.uscourts.gov/opinions/08-1502.pdf) which held that: “A grant of a right to ‘make, use, and sell’ a product, without more, inherently includes the right to have a third party make the product. A clear intent shown in a contract to exclude ‘have made’ rights can negate what would otherwise be inherent.” Simply stated, “have made” rights are in, unless they are expressly carved out of the license.

Corebrace makes it clear that this implied “have made” right is not a “sublicense” right (which was expressly prohibited in the license granted to Star Seismic). Instead, this implied right emanates from a Court of Claims decision which stated that “[a license to make, use, and sell] is not restricted to the production by the licensee personally or use by him personal or sales by him personally. It permits him to employ others to assist him in the production and in the use and in the sale of the invention.” Carey v. United States, 326 F.2d 975, 979 (Ct. Cl. 1964).

PRACTICE POINTS IN VIEW OF COREBRACE:

As a patentee, if you do not want to extend “have made” rights, the license grant should include unambiguous language that explicitly preclude such rights.

As a licensee, despite the clear holding in Corebrace, it is still good practice to expressly include “have made” rights in the license grant. Patent licenses are contractual rights that are evaluated under state law. In Corebrace, the governing law was Utah. Since the Supreme Court of Utah was silent on this issue, the Federal Circuit looked to its own precedent to decide this issue. A case originating from a different state could end up with a different result.

What about the third-party supplier? In Corebrace, the action was between the patentee and the licensee. The third-party manufacturer supplying Star Seismic was not a party to the action. Although Star Seismic was conferred implied “have made” rights, it is not clear (at least to me) that this implied right would extend upstream and protect the third-party manufacturer who is making the product. Authorized sales by the licensee clearly “exhaust” patent rights with respect to downstream purchasers, but does an authorized purchase have the same effect upstream? If the purchase is authorized, does that imply that the sale is also authorized? Those are questions for another day...please let me know your thoughts on this.

Bilsky Taken Up By Supreme Court

Will the Scope of Patent Eleigible Subject Matter be Redefined?

In a decision that is viewed as a bit of a surprise to many, the Supreme Court has granted certiorari in Bilsky v. Doll, U.S. No. 08-964, to review the en banc Federal Circuit decision which held that “[a] claimed process is surely patent-eligible under §101 if it is (1) ties to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” (In re Bilsky, 545 F.3d 943 (Fed. Cir. 2008))

The Bilsky decision, which appears to define a bright line test for patent eligible subject matter, fails to provide guidance in some important areas. For example, is a general purpose computer operating with unique software a “particular apparatus”? Also, can the transformation of data alone qualify as “transform[ing] a particular article into a different state or thing"? With these questions unanswered, the impact of Bilsky’s “machine-or-transformation” test has been most significant in the software and business method sectors, with §101 rejections being more common from the USPTO and §101 now being a real and viable defense in patent litigation. Indeed, the court in the Middle District of Florida just recently invalidated an asserted patent under 35 U.S.C. § 101 in the case of Every Penny Counts, Inc. v. Bank of America Corp., 07-CV-0042.

The Supreme Court agreed to hear two questions:

(1) Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. §101, despite this Court's precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”

(2) Whether the Federal Circuit's “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. §273.

Where will this lead? Good question. The Supreme Court has not been particularly kind to patent owners and broad patent rights in its recent decisions. Then again, the Supreme Court has not been particularly kind to the Federal Circuit either. Its past decisions over the years on the question of patentable subject matter, however, tend to avoid bright line standards and lean towards a more liberal scope of patentable subject matter, but certainly don’t embrace the scope of “anything under the sun made by man” as the Court once suggested. Merely taking the case, however, means that a definitional moment in the area of patentable subject matter is likely on the horizon. Now, its time for the waiting to begin and for the amici to enter the fray.

A Holding of Invalidity Deserves a Complete Analysis

Last week, in Steven Ritchie et al. v. Vast Resources, Inc. (2008-1528, -1529) the Federal Circuit summarily reversed the findings of the district court and held that the asserted patent (RE 38,924, http://www.google.com/patents?id=LasVAAAAEBAJ&dq=RE38924) was invalid as being obvious. (Yes, I know that it is far more appropriate to say that the asserted or challenged claims were found invalid, but in this case, the Court doesn't mention which claims were on appeal or which claims were actually held to be invalid.)

The subject matter of the patent is somewhat low tech –OK, its a sex toy made of a type of slippery glass known as “borosilicate glass.” Notwithstanding the apparent simplicity of the underlying . . . umm . . . technology, before reaching the Federal Circuit, the patent survived both initial examination and re-issue proceedings at the USPTO and was found to be valid and infringed at the district court.

Judge Posner, sitting by designation, wrote the opinion that was joined by Chief Judge Michel and Judge Bryson. (The opinion can be found at http://www.cafc.uscourts.gov/opinions/08-1528.pdf). Judge Posner clearly had some fun writing this opinion, which includes a number of jokes directed at the subject matter of the patent. I enjoyed reading the opinion. Unfortunately, in the end, the opinion is long on wit and generalities about obviousness, but is extremly limited with respect to providing any real guidance on the application of the obviousness inquiry post-KSR.

In this opinion, there is very little discussion of the actual claim limitations in question, how the prior art was applied to those limitations, or the actual basis for deciding why a person of ordinary skill in the art would arrive at the conclusion that the differences between the prior art and the claimed invention were indeed obvious. From the opinion, the reader merely knows that both sex toys and borosilicate glass are well known. It is quite possible that the conclusion reached by the Federal Circuti is correct, but that conclusion simply does not flow from the information provided in the opinion.

Finding a patent claim invalid is a significant holding. As such, a finding of invalidity in the first instance by the Federal Circuit should be supported by a more thorough analysis that clearly supports the holding. Even patents directed to sex toys deserve an informed analysis regarding the Graham factors before finding a patent invalid! In my own humble opinion, the obviousness inquiry should not be relegated to an amorphous analysis akin to pornography, e.g., an “I know it when I see it” approach.

Without question, some patents are directed to subject matter that is obvious and those claims should be invalidated. When those cases are presented, the Federal Circuit would better serve patent owners, defendants, district courts and the patent bar by providing an analysis that informs the process and clearly justifies the result.

TransCore LP v. Electronic Transaction Consultants Corp.

Patent Exhaustion and Legal Estoppel

Previous Settlement Leaves Patent Owner “Exhausted”

In June 2008, the Supreme Court decided Quanta Computer, Inc. v. LG Electronics and reaffirmed that the doctrine of patent exhaustion is alive and well and is fully applicable to method claims. (For a more thorough discussion on Quanta, see http://www.dorsey.com/eupdate_quanta_v_lg_electronics_inc_070108/). The Federal Circuit has now taken the opportunity to further bolster the patent exhaustion doctrine in the recently decided case of TransCore LP v. Electronic Transaction Consultants Corp., 2008-1430.

The facts of TransCore can be briefly summarized as follows. The patent owner, TransCore, was involved in a litigation in 2000 against Mark IV Industries. That action was resolved by a settlement agreement in which Mark IV paid TransCore $4.5M in exchange for an “unconditional” covenant not to sue under a denominated list of ten (10) U.S. Patents and the foreign counterparts thereof. After listing the specific patents within the covenant, the settlement agreement provided that “This Covenant Not To Sue shall not apply to any other patents issued as of the effective date of this Agreement or to be issued in the future.” The defendant, Electronic Transaction Consultants (ETC), purchased product from Mark IV and was sued for infringement of three patents that were previously asserted against Mark IV as well as one later issued patent, U.S. Patent No. 6,653,946 (“the ‘946 patent”). The district court granted summary judgment in favor of ETC finding that patent exhaustion precluded the assertion of the previously litigated patents and that TransCore was legally estopped from asserting the later issued ‘946 patent.

TransCore presents two significant issues. First, does a covenant not to sue that was provided as part of an earlier settlement agreement create an “authorized sale” that triggers patent exhaustion? Second, should the patent owner be estopped from asserting a later-issued patent, if that later-issued patent would limit the value of a right previously granted for valuable consideration?

With respect to the first issue, the Federal Circuit held that the fact that the right conveyed was described as a covenant not to sue, rather than a license grant, was a distinction without a difference in the context of the exhaustion analysis. By granting an unconditional covenant not to sue, the patent owner authorized the original defendant, Mark IV, to make, use and sell products under the asserted patents without threat of suit. This authorization was sufficient to exhaust TransCore’s rights against downstream purchasers, such as ETC. The comparative analysis between a covenant not to sue and a patent license provided in the TransCore opinion is worth reading, but the result, which favors substance over form, is not particularly controversial in view of Quanta.

The second issue is somewhat more problematic. The ‘946 patent was described by the Court as “a related patent that was pending before the Patent and Trademark Office but had not yet issued at the time of the TransCore-Mark IV settlement.” In the district court, “TransCore did not dispute that…the ‘946 patent was broader than, and necessary to practice, at least [one patent] that was included in the TransCore-Mark IV settlement agreement.” On this basis, the Federal Circuit held that “in order for Mark IV to obtain the benefit of its bargain with TransCore, it must be permitted to practice the ‘946 patent to the same extent it may practice [the patents listed in the settlement agreement].” As a result, TransCore was “legally estopped from asserting the ‘946 patent against Mark IV in derogation of the authorizations granted to Mark IV [under the settlement agreement].” Thus, the Corut held that Mark IV had an implied license to the later issued ‘946 patent and this implied license inured to the benefit of ETC.

Given the unambiguous language of the covenant not to sue, this result is somewhat troubling. The “benefit” Mark IV bargained for in the settlement agreement was TransCore’s forbearance of suit under a clearly defined set of patents. The parties certainly could have included language that would have embraced related patents, such as continuations, continuations-in-part and divisional applications, but chose not to do so. The parties also could have agreed to include pending applications, but chose not to do so. To the contrary, the parties expressly agreed to a covenant not to sue covering a closed-end list of U.S. and foreign patents and included language expressly excluding later issued patents. The parties valued this agreement at $4.5M.

The patent owner certainly received consideration for the covenant that was granted. However, it is entirely reasonable to believe that the amount of consideration was determined after a thoughtful analysis by both parties as to what was, and was not, included in the agreement. Was there a “derogation of rights” in this case that needed to be cured by imposing an implied license, or simply a party disappointed at the result of the limited bargain that it entered into? What is troubling here is that the Court’s holding in this case seems to result in a significant expansion of the rights that were actually conveyed, contrary to the express language of the agreement.

Can patent owners avoid this result in the future? In drafting language for license agreements and covenants not to sue, parties, especially patent owners, must take heed of the recent decisions in Quanta and TransCore, and use carefully crafted language in order to specifically define what is, and is not, authorized activity. Even then, there is clearly a risk that the doctrines of patent exhaustion or implied license may be imposed to limit the patent owners actions against third parties.

POINT OF NOVELTY

The world of patent law is in transition. The last few years have seen unprecedented levels of patent litigation spurred on by many substantial verdicts and an increase in the number of non-practicing entities looking to acquire and assert patent rights.

In what would appear to be a response to this trend, the Supreme Court has, among other things, made it easier to invalidate patents and harder to get injunctions when a patent is found to be infringed. As a trial lawyer who represents both patent owners and companies that need to defend themselves against accusations of infringement, this trend cannot be considered either clearly bad or good- but it is a significant legal and economic issue and must be understood.

This blog will follow and evaluate current trends in patent law and policy and try to offer insight as to how these trends impact the ability to obtain and enforce patents.


(Yes, I know that there is no longer a "point of novelty" test in patent law. But the concept, a single differentiating point, seemed to be as a good title for this blog as any.)

The views expressed in this blog are mine alone and should not be attributed to Dorsey & Whitney LLP, its attorneys, or its clients.