Why so quiet?

Sadly, it has been a while since I posted on the Point of Novelty.

The reason for the hiatus is two-fold:  First, I have just been really busy since the beginning of October;  Second, and perhaps more on point, it has bee a fairly quiet couple of months for significant developments in IP law.  The Federal Circuit has only issued three precedential patent opinions so far this month and only three in November, and none of those cases excited me enough to sit down and write about them.

The lack of activity over the last two months suggests that we may see a flurry of activity early in the new year and I expect to get back on track with more regular posts.  Until then, I wish you all a very happy holiday season and a wonderful new year.

 

Patent Reform Bill Becomes Patent Reform Law

No surprises here, but now its official.  President Obama has signed the America Invents Act and has now officially brought us patent reform.  As of today, the old qui tam false marking cases are dead.  As of today, multi-defendant patent cases will be less frequent.  As of today, the clock is ticking to when the other significant provisions of the new law go into effect.  If nothing else, it should be interesting.  Stay tuned.

Highlights of the America Invents Act

I didn't get around to writing up a summary of the changes that are coming when H.R. 1249 gets the President's signature this week.  Fortunately, many others have.  Here is a link to one such write up put together by Ken Levitt and Ryan Fortin in Dorsey's Minneapolis office.  Thanks guys!

Unintended Consequences from Patent Reform- Joinder and the Race to the Courthouse

One of the many features of the America Invents Act, is a new statute addressing joinder in patent cases. (Added as 35 U.S.C. 299).  Under this new section of the Patent Act, a plaintiff will no longer be able to group unrelated defendants together simply because they are accused of infringing the same patent.  Once President Obama signs the patent reform bill into law (which is expected to happen tomorrow), there will need to be a legitimate factual nexus among the various defendants – which in most cases will require making, using or selling the same product.

What this means for plaintiffs’ is that in more cases than not, new cases will have only one defendant per complaint instead of the large collection of defendants that are now common in most patent cases.  This won’t stop the case from being filed, of course, but will result in a modest increase in transaction costs for filing a complaint since for 10 defendants a plaintiff will need to file 10 complaints and pay $3500 in filing fees instead of $350.  (We should expect to see a spike in the number of patent cases filed next year, since the “typical” case filed recently will now require multiple filings).  This change should also make it easier for individual defendants seeking to transfer the case from a venue that it has little or no connection to, since (in theory) it no longer needs to consider the potential ties other defendants may have to the plaintiff’s chosen forum.  On the downside, it may also make the logistics of joint defense groups slightly more complicated as defendants’ will need to coordinate across a number of related cases instead of acting within a single case.  (As a practical matter, I expect that most judges will likely be inclined to consolidate the related cases at least for purposes of discovery, minimizing the logistical complications.)

So, what are the unintended consequences referred to in the title of this post?  It may be coincidence (if you believe in such stuff), but the number of multi-defendant cases filed since the Senate passed the patent reform bill seems unusually high.  PriorSmart litigation alerts so far this week show 88 new complaints with 515 defendants, including today's report of 18 new complaints against a whopping 196 defendants.  It looks like plaintiffs are racing to the court house to get there last multi-defendant complaints filed before President Obama signs the bill into law and changes the rules of the game.  No one is being sued who wouldn’t eventually be sued anyway, but they may be seeing the lawsuit a bit sooner.  Welcome to the brave new world of patent reform.

Does First Inventor To File REALLY favor Big Business?

Patent reform is now a reality.  The bill is in the hands of President Obama and it’s expected that it will be signed into law on Friday.  One of the significant and controversial changes in the America Invents Act is that patents will now be awarded to the first inventor to file, rather than the first inventor.  Every time first-to-file has been proposed for the U.S., many commentators would cry out that first-to-file is bad for small companies and individual inventors since large corporations have the resources needed to get applications on file fast.  Clearly, big corporations have financial resources, but does that really mean that they have an edge in a first-to-file system? 

In a race to the patent office, speed and agility will be at a premium.  Currently at many large companies, the large budget – those resources that the commentators all fear- comes with a price.   Layers of corporate bureaucracy make the process from invention to filing fairly long. Many months, sometimes years may pass before an application is filed.   For these large companies to succeed in a first-to-file paradigm, the process currently used to identify inventions, gather and evaluate invention disclosures from inventors, approve a disclosure for filing, prepare the application, and approve the application for filing need to be reviewed and streamlined.   These companies are currently built for power, not speed, and need to change their thinking or suffer a disadvantage in the first-to-file system. 

In contrast, small companies, should be able to move quickly to get applications for important inventions on file.  Budget will, of course, play a part in the decision to move forward, but its certainly not the only (or main) factor that will determine who has the advantage in the new first inventor to file paradigm.  The reduced patent office fees available for small entities, the strategic use of provisional patent applications, and a lower cost “Track 3” filing system that will  be rolled out by the patent office that will allow applicants to pay a lower fee to file while deferring examination for a later date, should provide small entities with the tools needed to insure that the first inventor to file system serves them well.

In short, I don’t believe that the first inventor to file system will inherently favor big entities over small.  It will ultimately favor those that adapt best to the new system.  Ladies and gentleman, start your engines – the race to the patent office is on.

Steve Jobs: Visionary and Prolific Inventor on Design Patents

In the wake of Steve Jobs' announcement that he is stepping down as C.E.O. of Apple, today's New York Times has an interesting interactive piece illustrating over 300 patents in which Mr. Jobs is a named inventor.
Given Apple's ability to consistently deliver sleek consumer products with a unique look and feel over the years, it is not too surprising that a majority of these patents are design patents, rather than utility patents.  Creative industrial design has been a hallmark of Apple, and Apple recognized that this key aspect of its innovation was worthy of protection.

The lesson from Steve Jobs:  If you invest in distinguishing your product in the market place with unique industrial design, you should also protect that investment through design patent protection.

Parallel Networks: Judge Davis Grants Summary Judgment in Favor of 99 Defendants

Following up on  my June 9 post regarding the Parallel Networks case, Judge Davis has now issued an order granting summary judgment in favor of 99 of the 112 defendants in these related cases.  This decision is a vindication of the defendants' position and, more importantly, justifies the use of the expedited process Judge Davis used in this case.  For a more comprehensive write up on this order, see Michael Smith's EDTexweblog.

Federal Circuit Rejects Computer Readable Media Claims under Section 101

The ebb and flow regarding the scope of patentable subject matter for computer-related inventions continues this week with the Federal Circuits decision in Cybersource Corp. v. Retail Decisions, Inc.

In Cybersource, two claims of U.S. Patent No. 6,029,154 (“the ‘154 patent”) were invalidated by the district court under 35 U.S.C. § 101 for failure to recite patent-eligible subject matter.  One of the claims, Claim 3 was directed to a “method for verifying the validity of a credit card transaction” and recited three steps, including “obtaining information…”, “constructing a map of credit card numbers…,” and “utilizing the map…to determine if the credit card transaction is valid.”   Claim 2 was directed to “computer readable medium containing programming instructions” and recited “execution of the program instructions by one or more processors of a computer system” in the body of the claim.  The Federal Circuit affirmed. 

The decision with respect to the naked method claim (claim 3) is not too controversial.  The outcome with respect to Claim 2, however, represents a significant shift in the patent-eligible subject matter landscape.  Why, you ask?  Because for the last 15 years, patent practitioners in the computer arts have relied on In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995) for the proposition that claims drawn to “computer readable media” were patent-eligible articles of manufacture, not methods subject to the vagaries of Section 101. (“The Commissioner now states ‘that computer programs embodied in a tangible medium, such as floppy diskettes, are patentable subject matter under 35 U.S.C. § 101 and must be examined under 35 U.S.C. §§ 102 and 103.’)  (Note - there was no actual holding from the Federal Circuit in In re Beauregard, simply a remand. Since the Commissioner ultimately agreed with Beauregard’s position, there was no longer a case or controversy and thus no jurisdiction before the Federal Circuit.) The Federal Circuit has now dispelled this long-held reliance: 

Cybersource contends that, by definition, a tangible, man-made article of manufacture such as a ‘computer readable medium containing program instructions’ cannot possibly fall within any of ht three patent-eligibility exceptions the Supreme Court has recognized for ‘laws of nature, physical phenomena, [or] abstract ideas.” [citation omitted] We disagree.  Opinion at 16.

With those two words, the validity of claims in thousands of issued patents to computer-related inventions  are now in doubt. 

One line from this opinion that I find somewhat disturbing is that “[r]egardless of what statutory category (‘process, machine, manufacture, or composition of matter’ 35 U.S.C. § 101) a claims language is crafted to literally invoke, we look to the underlying invention for patent-eligibility purposes.”  In every other context we need to look at the claim language, all of the claim language, in order to define the “invention.”  Under the Cybersource analysis, courts may now ignore express limitations in the claim (such as “computer readable media” or “one or more processors”) to determine an “underlying invention” that is broader than what is actually claimed in order to invoke Section 101.  Creating a double standard for the Section 101 analysis just doesn’t feel right.

Very little is certain about the scope of patent-eligible subject matter for computer-related inventions in view of the Cybersource decision except this:  we have not seen the end of this issue.  My bet is that en banc review is in our near future.

8 Million U.S. Patents and Counting

The United States Patent and Trademark Office reached another milestone when it issued U.S. Patent No. 8,000,000 this week.

According to the USPTO website, "[u]nder the current numbering system for patents, number 1 was issued in 1836. A million patents later, number 1,000,000 was issued by the United States in 1911. The U.S. Patent and Trademark office issued patent number 8,000,000 on August 16, 2011."

The rate of patent grants has certainly been accelerating over the last 20 years.  U.S. Patent No. 7,000,000 issued on Valentines day in 2006, just over 5 years ago.  It took about 15 years to get from U.S. Patent 4,000,000 to 5,000,000 (which issued in 1991) and about 75 years to get from U.S. Patent No. 1 to U.S. Patent No. 1,000,000!

The Need For Patents Drives Google Acquisition of Motorola Mobility

Several weeks ago, I noted that patents were being associated with big money --make that really big money -- in several important events.  That trend continues this week with Google's announcement that it is seeking to acquire Motorola Mobility in a transaction valued at $12.5 Bil.  (This comes about a month after Google came up short in the $4.5 Bil Nortel patent auction.)  It is well understood that a strong patent portfolio can serve as a deterrent to litigation from a competitor that fears a counterclaim, or as a tool to settle patent litigation through cross-licensing deals.  It is no secret that a significant driving force behind this move is Google's need to strengthen its patent portfolio, especially in the wireless area.  (It is being reported that Motorola's active patent portfolio includes over 14,000 issued patents, and a pipeline of thousands of pending applications.)   As noted by Larry Page (on Google's blog) "[o]ur acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies."

Motorola has a long history of investing in technology and supporting that investment with patent protection.  If there was ever any doubt that a strong intellectual property program contributes to the core value of an enterprise, those doubts should be dispelled in view of the large premium (more than 60% over Friday's closing price) being offered by Google in this deal.  In the fiercely competitive cell phone handset and tablet market, Google needs to strengthen its defensive patent position to compete effectively and is looking to do so by gaining access to a patent portfolio developed over the years by an enterprise that has long recognized the value in protecting its innovation.

Federal Circuit Affirms Sanctions and Attorney Fees Against NPE

As a young lawyer preparing for one of my first hearings, I asked my mentor for some last minute advice.  He said “follow two simple rules and you will be fine.  Rule # 1 - don’t piss off the judge.”  Well, that was simple enough, so I asked “OK, so what’s Rule # 2?”  He peered over his bifocals and said with a laugh, “Rule # 2 - make sure that you never forget Rule # 1!”  Apparently, Jean-Marc Zimmerman and his client Eon-Net didn’t receive this sage advice.  Last week, in Eon-Net et al v. Flagstar Bancorp 2009-1308, the Federal Circuit affirmed the district court’s award of $489,150.48 in attorney fees and costs under 35 U.S.C. § 285 as well as $141,984.70 in sanctions under Fed. R. Civ. P. 11.

The case, which is one of about a hundred filed by Eon-Net, has a long procedural history, including a previous trip up to the Federal Circuit following an initial sanctions award.  Following remand from the Federal Circuit, the district court engaged in claim construction proceedings, and found that the written description limited certain claim terms as needing to originate from “hard copy documents” (as opposed to electronic files or information entered via a user interface).  The parties stipulated to non-infringement under this construction and Flagstar moved for a finding that the case was exceptional under §285.  The district court granted this motion “on what it found were Eon-Net’s pursuit of baseless infringement claims, Eon-Net’s improper purpose of bringing the lawsuit against Flagstar to obtain a nuisance value settlement, Eon-Net’s destruction of evidence, and Eon-Net’s offensive litigation tactics.”  Opinion 8-9.  The court also invited Flagstar to renew its previous motion for sanctions (which, of course, it did).  The court then granted the motion for sanctions under Rule 11 “concluding that Eon-Net and its counsel failed to perform a reasonable pre-filing investigation and that their claim construction positions were unsupportable.”

One point that is noteworthy is that the claim language does not expressly limit the claim to “hard copy documents.”  Instead, this construction comes from the specification’s repeated reference to “hard copy documents” and characterizing the invention as relating to “hard copy documents.”  The Federal Circuit noted that “[i]n total, the term “hard copy document” appears over 100 times in the common disclosure of [the asserted patents.]”  Although Eon-Net tried to argue that this was merely a preferred embodiment, the Federal Circuit disagreed and found that “[t]his is not a case where a district court improperly imported a limitation from the specification or where the question of what the specification teaches about the claims presents a close call; here, the specification unequivocally compels the constructions adopted by the district court.”  Opinion at 15-16.

Exceptional Case Finding

In finding a case to be exceptional, “[l]itigation misconduct and unprofessional behavior may suffice, by themselves, to make a case exceptional under §285.”  Opinion at 17.  (citations omitted).  This first test goes directly to my mentor’s Rule # 1.  “Absent litigation misconduct or misconduct in securing the patent, sanctions under §285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless.”  Opinion at 17.  This second test is far harder standard to satisfy.

So, how did Eon-Net break Rule # 1?  First, by destroying potentially relevant evidence. Eon-Net’s principal, Mitchell Medina, testified that “with regard to document retention, collection, and production that ‘I don’t save anything so I don’t have to look’ and further testified that his companies “‘have adopted a document retention policy which is that we don’t retain any documents’ because those companies ‘have evolved into patent enforcement companies which are  involved in the business of litigation.”  Second, by failing to meaningfully engage in the court’s claim construction process by failing to offer a construction for any of the disputed claim terms and than submitting misleading extrinsic evidence to the court.  Third, by offering ridiculous discovery responses, such as “the skill in the art required is that sufficient to converse meaningfully with Mitchell Medina.”  Although Eon-Net argued that these were merely “flippant, facetious remarks not intended to offend,” offend they clearly did!

Objectively Baseless Litigation and Bad Faith

The district court found that Eon-Net’s allegations were objectively baseless based on the claim construction that limits the claims to “hard copy documents.”  The Federal Circuit agreed, finding that “because the written description clearly refutes Eon-Net’s claim construction, the district court did not clearly err in finding the Eon-Net pursued objectively baseless infringement claims.”  Opinion at 21.

In addressing Eon-Net’s bad faith in pursuing the litigation, the district court held that the case has “’indicia of extortion’ because it was part of Eon-Net’s history of filing nearly identical patent infringement complaints against a plethora of diverse defendants, where Eon-Net followed each filing with a demand for quick settlement at a price far lower than the cost to defend the litigation.”  Opinion at 22.  Specifically, Eon-Net had filed over 100 complaints and offered immediate settlement in the range of $25K to $75K depending on a defendant’s sales. “[T]hose low settlement offers-less than ten percent of the cost that Flagstar expended to defend suit – effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements.”  Opinion at 23. 

Rule 11 Sanctions

In imposing sanctions against Eon-Net and Zimmerman, the district court found that the pre-filing investigation was insufficient.  Significantly, it is not disputed that “Eon-Net’s counsel did examine portions of Flagstar’s website and, based on his experience, concluded that it worked in a manner that infringed the ‘697 patent.”  Opinion at 26.  The Federal Circuit found this was not enough.  “A reasonable pre-suit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device.”  Opinion at 26.  The district court found that Eon-Net’s claim construction positions “borders on the illogical” and in affirming the sanctions award, the Federal Circuit did not find this position to be clearly erroneous.  Opinion at 26.

Observations & Take Aways

What does all this have to do with my mentor and Rule # 1?  Given the facts of this case, and the applicable standard of review, if the district court had DENIED Flagstar’s motion for attorney fees and sanctions, it is very unlikely that the Federal Circuit would have disturbed that finding.  Clearly, the plaintiff behaved in a way that offended the court on several fronts, starting with the basic business model and extending to the disrespectful attitude exhibited to the court by Mr. Medina.  One or the other might have been tolerated – together these factors were fatal.  At the end of the day, had Mr. Medina and Eon-Net’s counsel pursued this litigation strategy in a manner that didn’t offend the court, it is likely that he wouldn’t now be forking over $600K in sanctions.  To paraphrase Rodney Dangerfield in “Back to School,” always follow Rule # 1, or you may wind up stepping in # 2.

FINAL NOTE- With over a hundred cases filed and most settling in the $25-75K range, one can make an educated guess that gross revenue to Eon-Net has been somewhere in the $3-5 Mil range.  It makes one wonder if the $600K in sanctions, while clearly significant,  is really an effective deterrent.

"A Million dollars isn't cool. You know what's cool? A Billion dollars!"

What does this quote from the movie "The Social Network" have to do with patent law?

You don't often hear "cool" being used in connection with patents and patent litigation, but lately we have been hearing Billion bantered about with incredible frequency.  Some notable examples include:

• Projections of the potential settlement value to Kodak of the current ITC action against Apple and Rim, which the Commission is set to act on this week.
• The ultimate price of the Nortel patent portfolio, which has a $900 Million "stalking horse" bid from Google, and significant interest from several cash-rich companies that could easily drive the final price well over a Billion dollars.
• The damages calculation of $2.6 Billion offered by Oracle's expert, now being disputed, in a case against Google involving the Android operating system. 

If there was any doubt about the continued value and vitality of patents as a tool for promoting innovation and advancing competitive business interests, these examples from this week's news should put that doubt to rest.  Maybe, just maybe, I can convince my kids that patents really are "cool."

Ackerman comments on Kodak ITC action in Marketplace

In the category of gratuitous self promotion, here is a link to a public radio broadcast (heard today on NPR) in which I provided some commentary to Marketplace on the Kodak ITC action involving cell phone cameras.  http://marketplace.publicradio.org/display/web/2011/06/22/am-kodak-battles-smartphones-over-camera-technology/

I thought I gave some better sound bites during the interview, and the one quote they used comes out  a bit in a vacuum without the context surrounding the quote, but I didn't have any input to the editing.

-Paul

The Supreme Court's Decision in Microsoft v. i4i - No Change

In Microsoft Corp. v. i4i, 10-200, the Supreme Court considered the issue of the appropriate standard of proof that is applicable when a party seeks to invalidate a patent.  The Federal Circuit has consistently held that the presumption of validity imposed a clear and convincing evidence standard.  Moreover, this standard applied even when the prior art relied upon by the defendant was not previously considered by the patent office.  Microsoft argued that the preponderance of evidence standard should apply to invalidity defenses, at least in those cases where a defendant presented evidence that was not considered by the patent office.  The Supreme Court rejected this argument and has unequivically held that the clear and convincing standard applies to assertions of patent invalidity.  In short, the decision can be summed up in two words - No Change.  

And that concludes the patent law Supreme Court Watch for this term.

Parrallel Networks – Recognition of a Patent Defendant’s “Hobson’s Choice” in the E.D. Texas

And the Start of a Trend to Help Defendants Deal With It?

Two (fairly) recent procedural orders from the Tyler Division of the Eastern District of Texas reflect a new approach to case management in patent cases, where defendant’s often face the no-win dilemma of settling a claim that they believe has little or no merit, or spending more than the settlement demand in defense costs to prove that it was not liable.

Imagine you’re a defendant in a “typical” multi-defendant patent case brought by a non-practicing entity. You look at the patent and the file history and try to make sense of the infringement allegation, but you can’t – no matter how you look at it, the claim is meritless. The plaintiff contacts you and offers to resolve the case with you for only $500K if you settle early, before both sides are forced to expend resources litigating the case. You know that it will cost over $1 Million to get through the discovery phase and claim construction proceedings and another million or more to get through summary judgment and trial. Given the ominous possibility of spending millions in legal fees to prove that your company did not infringe the plaintiff’s patent (and still have some risk that the judge or jury won’t agree), the $500K offer starts looking like a “reasonable” business resolution to the dispute, even though you are sure that the claim has no merit.

This scenario plays out on a regular basis in cases brought by non-practicing entities. The problem has been particularly acute in the Eastern District of Texas, a forum known to favor trials over summary judgment as the best tool for resolving disputes. The Local Patent rules, intended to efficiently and fairly move cases to trial simply do not provide a built in mechanism for a defendant to dispose of a weak case without spending hundreds of thousands or millions of dollars in defense costs. Plaintiff’s recognize and exploit this dilemma – filing suit against dozens, sometimes over a hundred, defendants, knowing full well that most, if not all, will settle for substantial amounts regardless of the merits of the claim.

Thus, the Hobson’s choice – pay the plaintiff and remove the risk, or pay defense counsel (maybe more than the settlement offer) and accept the risk of success.

Judge Davis faced this dilemma head-on in Parallel Networks v. Abercrombie & Fitch, et (6:10-cv-111) and to his credit, fashioned a procedural remedy to address this problem.  (See Memorandum Opinion and Order, D.I. 338, March 15, 2011).  In Parallel Networks, the plaintiff (a NPE) filed suit against 124 defendants in four related cases. In response to J. Davis’ inquiry, plaintiff’s counsel admitted that its litigation strategy involved offering defendants a substantial discount on potential liability to entice early settlement. The magnitude of the settlement offer was based less on a risk-based assessment of potential damages, but on the certainty of incurring significant defense costs.  J. Davis noted that “[p]laintiff’s strategy presents Defendants with a Hobson’s choice: spend more than the settlement range on discovery, or settle for what amounts to cost of defense, regardless of whether a defendant believes it has a legitimate defense.” Defendants’ counsel argued for a limited claim construction/summary judgment proceeding in which the parties would only address three (3) claim limitations that defendants’ argued as being case dispositive. J. Davis granted this request and significantly limited discovery until this motion is resolved. (A hearing is set for June 21, 2011).  The parties will be bound by the court’s construction of the three claim terms, but will not otherwise be prejudiced by this early summary judgment motion.


A month later, in Whetstone Electronics, LLC v. Xerox Corp., (6:10-cv-278) Magistrate J. Love, also in Tyler, followed suit and granted a similar order. (See Order, D.I. 156, April 7, 2011).  A Markman hearing on the three selected terms in this case is scheduled for July 13, 2011.


If these summary procedures successfully resolve these cases (in other words, if the defendants’ cases are as strong as they have suggested to the court) Parallel Networks may signal the start of a trend towards case management of multi-defendant cases in which the defendants have a meaningful procedure available to dispose of meritless cases without being driven to resolution solely by the cost to defend the case, regardless of the merits. To insure that this happens, however, defendants have an obligation to the court to deliver the goods. If, in every case, the defendants call for an expedited summary proceeding and fail to deliver clear positions where no questions of fact preclude summary judgment, it would not be surprising for the court to conclude that these procedures are not justified and revert to more traditional case management.


*** I started this post back in April, after the Whetsone order, but didn't get around to finishing it then.  Its not "hot news" anymore, but its still important so I thought it was worth posting now, even if its a bit late.

-Paul

The Supreme Court Interprets the Bayh-Dole Act as Not Automatically Conveying Inventions to Contractors

Yesterday, the Supreme Court issued its second patent related decision of the term in The Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, 09-1159, a case addressing the issue of ownership of inventions made with government research funding. A 7-2 majority of the Court, lead by Chief J. Roberts, held that the Bayh-Dole act does not alter the fundamental proposition that ownership of an invention initially vests with an inventor, and as such, title does not automatically vest in a contractor, such as a university, when an invention is made with the support of federal funding.

This case involved competing agreements with an inventor: an agreement between the inventor and the university in which the inventor “agrees to assign” later made inventions and a second agreement with Roche in which the inventor immediately assigned a specific invention.

The “agree to assign” language did not operate as an immediate conveyance and the Supreme Court held that the "Bayh-Dole act does not automatically vest title to federally funded inventions in federal contractors or authorize contractors to unilaterally take title to such inventions."  As a result, Stanford was out of luck.


One significant take-away from this decision is that recipients of federal research funding cannot rely solely on the Bayh-Dole act and should review the language in employee and research agreements with respect to assignment of future inventions. Language in these agreements that impose an obligation in the future, such as "agrees to assign," should be replaced with affirmative language, such as "hereby does assign."

The Supreme Court Redefines the Knowledge Element of Inducement

The Supreme Court issued its opinion in Global Tech Appliances v. SEB S.A., 10-6 on May 31, 2011. The Global Tech case redefines the standard for the intent element of inducement under 35 U.S. C. 271(b).

Relying primarily on the Court’s longstanding ruling in Aro Mfg. Co. v. Convertible Top Replacement, Co., 377 U.S. 476 (1964)(“Aro II”), which addressed the knowledge requirement for contributory infringement under 35 U.S.C. 271(c), an 8-1 majority held that “induced infringement under 271(b) requires knowledge that the induced acts constitute patent infringement.” Slip Opinion at 10. The Court rejected the Federal Circuit’s “deliberate indifference to a known risk” standard, but affirmed the lower court’s finding of inducement without proof of actual knowledge by the infringer “because the evidence in this case was plainly sufficient to support a finding of Pentalpha’s knowledge under the doctrine of willful blindness.” Id. (emphasis added). Thus, the Supreme Court articulated a knowledge requirement for inducement that can be satisfied with constructive knowledge under the “willful blindness” doctrine.


The Court held further held that willful blindness has

two basic requirements:

(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact.

Opinion at 13.

The Court found that Pentalpha, which inter alia, had substantially copied a competitor’s product, and then had its patent attorney conduct a freedom to operate search for this product without informing him that the design was copied from a competitor. From this, the Court concluded that the “evidence was more than sufficient for a jury to find that Pentalpha subjectively believed there was a high probability the SEB’s fryer was patented, that Pentalpha took deliberate steps to avoid knowing that fact, and that it therefore willfully blinded itself to the infringing nature of Sunbeam’s sales.”

Justice Kennedy, the lone dissent, agreed that inducement has a knowledge component, but disagreed that “willful blindness” was an appropriate substitute for actual knowledge.

With the Supreme Court offering a degree of clarity that inducement requires knowledge that the “induced acts constitute patent infringement,” (which is consistent with Federal Circuit precedent since DSU) proving inducement in the course of patent litigation will often prove to be a challenge for patent owners. Moreover, a factually well founded and competent opinion of counsel indicating that the induced acts do not constitute infringement of a valid patent should provide a strong defense to allegations of inducement.

En Banc Federal Circuit "Tightens" Inequitable Conduct Doctrine

The Federal Circuit issued its much anticipated en banc ruling today in Therasense v. Becton Dickinson.


This case presented questions directed to what conduct could constitute inequitable conduct before the patent office and what standards should apply to prove inequitable conduct.  Although the majority did not fundamentally alter the core principals of the inequitable conduct doctrine, in remanding the case to the district court, it did take steps to "tighten" a doctrine it viewed as having "plagued not only the courts but also the entire patent system." Opinion at 23.

The majority stated that “to prevail on the defense of inequitable conduct, the accused infringer must prove that the applicant misrepresented or omitted material information with the specific intent to deceive the PTO.” Opinion at 19. The majority also affirmed that both materiality and intent must be established by clear and convincing evidence.  Id.  Although this does not reflect a significant doctrinal change, there are significant changes made in Therasense as the “court now tightens the standards for finding both intent and materiality in order to redirect a doctrine that has been overused to the detriment of the public.”

Some highlights of this "tightening" include:

With respect to Intent:

• Because an accused infringer must establish a “specific intent to deceive the PTO,…the accused infringer must prove by clear and convincing evidence that the applicant knew of the reference, knew it was material, and made a deliberate decision to withhold it.” Opinion at 24 (emphasis added).
• “A district court should not use a ‘sliding scale,” where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa.” Opinion at 25.
• A district court may still use indirect and circumstantial evidence to establish intent, but “the specific intent to deceive must be ‘the single most reasonable inference able to be drawn from the evidence.’…Hence, where there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found.” Opinion at 26.
• “The absence of a good faith explanation for withholding a material reference does not, by itself, prove intent to deceive.” Id.

With respect to materiality:

 "[T]he materiality required to establish inequitable conduct is but-for materiality. When an applicant fails to disclose prior art to the PTO, that prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art.” Opinion at 27.

• But, in assessing materiality, the district court should apply the reference the way an examiner would, i.e., “the court should apply the preponderance of the evidence standard and give claims their broadest reasonable construction.” Opinion at 28
• The but-for test has an exception: “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Opinion at 29.
• “This court does not adopt the definition of materiality in PTO Rule 56.” Opinion at 32. Thus a reference is not "material" simply because it may be “inconsistent with a position taken by the applicant” or if it could “compel a conclusion that a claim is unpatentable…before any consideration is given to evidence which may be submitted in an attempt to establish a contrary conclusion of patentability.” Opinion at 33. The but-for materiality standard is narrower than the various incantations of Rule 56 over the years and to be satisfied, a reference must compel a finding of invalidity after all relevant evidence is considered (such as secondary considerations of non-obviousness or arguments why the rejection is improper).

These changes should allow attorneys who engage in patent prosecution to breath a little easier.  Inequitable conduct is far from a dead doctrine following Therasense (as some had hoped), but by raising the standards for both materiality and intent, and eliminating the "sliding scale" whereby intent can be inferred from the omission of a highly material reference, the Federal Circuit has limited the application of this doctrine.

(In future posts, I may discuss the concurring and dissenting opinions, but for the sake of time (mostly mine) I limited this post to the highlights of the 37 pg. majority opinion.)

Dorsey & Whitney Successfully Defends Against False Marking Claim

In re BP Lubricants Provides Defense to False Marking Claims

As reported last month, BP Lubricants was expected to provide a difficult barrier for many false marking plaintiff's.  A recent win in the Northern District of Texas, by my Dorsey colleagues Tom Vitt and  Dustin Adams in North Texas Patent Group, Inc. v. Manhattan Group LLC, in which the complaint was dismissed with prejudice, demonstrates that this is indeed the case.

Dustin Adams has provided a great write up on this case that can be accessed at the following link.  Link to full article

Congratulations to Tom and Dustin on the win and many thanks to Dustin for the contribution to the blog.

Federal Circuit Issues Writ of Mandamus in In Re BP Lubricants

Applies Heightened Pleading Requirements

to False Marking Cases

The Federal Circuit issued an Opinion and Order in In Re BP Lubricants USA Inc. today ( Misc. Docket No. 960) granting in part BP Lubricant’s petition for a writ of mandamus.

The issue before the Court was whether the district court properly denied BP’s motion to dismiss a false marking case where the allegations of intent to deceive were no more than general statements that BP "new or should have known" about its patents having expired.  BP argued that a complaint alleging false marking must satisfy the heightened pleading requirement of Fed. R. Civ. P. 9(b) as interpreted by the Federal Circuit in Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312 (Fed. Cir. 2009).

Recognizing that the case presented a question of first impression, and that district courts have been split on the issue, the Federal Circuit granted review and issued a writ of mandamus. The Court agreed with BP that false marking cases must be plead with particularity under Rule 9(b) and that “Excergen’s pleading requirements apply to all claims under Rule 9(b), not just inequitable conduct cases.” Opinion at 7. In those cases where false marking allegations are based on an expired patent, “a complaint must in the § 292 context provide some objective indication to reasonably infer that the defendant was aware that the patent expired.” A statement that the patent owner “knew or should have known that the patent expired” is not sufficient.


The plaintiff in BP Lubricant’s will be given leave to amend its complaint. It remains to be seen, however, whether the plaintiff will be able to meet the heightened pleading requirement it now faces.

The guidance provided by the Federal Circuit in In re BP Lubricants significantly raises the bar for pleading alleged violations under § 292 and should provide defendants facing these claims with a more solid foundation on which to base a motion to dismiss.

Texas Data v. Target: Transfer Motions in False Marking Cases in The Eastern District of Texas

In 2010, we witnessed a bit of a new trend in the Eastern District of Texas. A number of cases were transferred out of the district. In the case of patent infringement actions, this was often with the help of the Federal Circuit issuing a writ of mandamus. In the context of the recent wave of false marking cases, however, it was not uncommon for the district court to grant a defendant’s motion to transfer under 28 U.S.C. 1404(a). Once recent exception is Texas Data Co. L.L.C. v. Target Brands, Inc., 10-CV-269, (E.D. Tex.), a false marking case in which Judge Ward denied defendant’s motion to transfer. (Memorandum Opinion and Order, January 12, 2011, D.I. 43, “Opinion”). Transfer motions tend to be very fact specific, and Texas Data is no exception. Judge Ward’s 27 page opinion provides a thorough discussion of the law governing transfer motions in the Eastern District of Texas (5th Circuit law) and the facts of the case before him. Although Judge Ward has historically been reluctant to transfer cases out of his district, Texas Data clearly turns on its own facts and does not appear to signal a new direction for venue motions in false marking cases.


Facts:

In Texas Data, the products that are allegedly improperly marked with an expired patent number are training pants that are sold by Target, a retailer which is based in Minnesota. The products was made for Target by Kimberly-Clark in a factory that is located in Paris, Texas in the Eastern District of Texas. Kimberly-Clark also has its headquarters in Irving, Texas. The packaging for the product, which allegedly has the improper patent marking printed on it, was made by Bemis, in a factory located in Longview, Texas, also in the Eastern District of Texas. Target provided evidence to establish that although the product and packaging were manufactured in the Eastern District of Texas, the decision to mark the product was primarily made in Kimberly-Clark’s facility in Neenah, Wisconsin, which is in the jurisdiction that Target sought to transfer to.


Movant’s Burden In False Marking Cases:

Target argued that less deference should be given to plaintiff’s in false marking cases. Judge Ward rejected this argument and held “that the burden of proof in a false marking case should be the same as the burden set forth in [In re Volkswagen of Am., Inc. (“Volkswagen II”), 545 F.3d 304 (5th Cir. 2008) en banc.] Opinion at 6.

In the Fifth Circuit, a defendant seeking to transfer a case must show “good cause” in order for the court to grant the motion. This burden is met when the moving party can demonstrate that the “transferee venue is ‘clearly more convenient’ than plaintiffs’ chosen forum.” Judge Ward notes that “plaintiff’s choice of venue is not an independent factor to be considered in the transfer analysis; instead deference to the plaintiff’s choice of venue is accounted for in the ‘clearly more convenient’ burden on the movant.” Opinion at 7.

Motion Denied:

In the analysis of the private factors and public factors set forth in Volkswagen II, the court did credit the fact that witnesses and other evidence related to the issue of “intent to deceive” was more likely to be found in Wisconsin and Minnesota, but also found that relevant evidence and witnesses relevant to other issues, such as damages, would be found in the Eastern District of Texas. In denying the transfer motion, the court held that

[i]n balancing the Gilbert convenience factors in this case, the Court observes that two factors slightly weigh in favor of transfer and one factor slightly weighs against transfer. Therefore, Target has not met its burden in showing the Eastern District of Wisconsin is ‘clearly more convenient than the Eastern District of Texas.   Opinion at 27.

Given the competing facts in Texas Data, this case does not stand out as a beacon of change for transfer motions in the Eastern District of Texas. The detailed opinion does, however, merit review for anyone considering bringing a motion to transfer out of the Eastern District of Texas.

The "First Sale Doctrine" in Copyright Cases - Omega S.A. v. Costco

Normally, the Point of Novelty stays on point with patent issues.  But, today we digress a bit...

A good discussion of Omega S.A. v. Costco Wholesale Corp., which addresses the issue of the first sale doctrine in the context of copyright cases can be found in an article recently written by my Dorsey colleagues, Bob Wasnofski and Jose Hernandez.  Here is a sample of the article:

On December 13, 2010, the Supreme Court issued a split decision (due to Justice Kagan’s recusal) in Omega S.A. v. Costco Wholesale Corp., 562 U.S. ___ (2010), thereby affirming the 9th Circuit ruling that the “first sale doctrine” does not serve as a defense to copyright infringement where one imports into the United States genuine, foreign-made copies of a copyrighted work without the authorization of the copyright owner. As it was a split decision, however, it does not serve as nationwide precedent. Nevertheless, in the 9th Circuit, the “first sale” defense can be used only in situations where the disputed copies of a copyrighted work are either made or previously sold in the United States with the authority of the copyright owner. As such, copyright owners of foreign-made copies are afforded significant protection in the 9th Circuit against the importation of “grey market” goods, allowing them greater control over the distribution and price of their products.

Click here to read the full article.

25% “Rule of Thumb” Rejected in Determining Patent Damages

Over the last several years, we have seen more and more damages experts rely on a so-called "25% rule" as a starting point in determining a “reasonable royalty” in patent cases. The 25% rule was applied as a “rule of thumb” that  allowed an accused infringer to retain 75% of the profits and awarded 25% of the infringer's profits to the patent holder. This 25% figure would typically be used as a starting point that would then be massaged using the Georgia Pacific factors to arrive at some final royalty rate, that was often very close to the 25% value. The problem with this approach is that while it sounds like a “reasonable” division of profits at some superficial level, and is certainly expedient in arriving at some starting point for analysis, it is universally divorced from reality in any specific case. Nonetheless, the 25% rule kept finding its way into articles, court decisions and expert reports...until now.

In Uniloc USA v. Microsoft Corp., 2010-1035, a case involving a patent on a software registration and copy protection system for products such as Microsoft Word, the Federal Circuit squarely rejected the use of this analytical fiction as being improper under Daubert. The Court held that:

This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue. Opinion at 41

         
In criticizing the 25% rule, the court pointed out that “[t]he  rule does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party."  

The Court recognized that the 25% rule was being used as a "starting point" rather than a final calculation but found that this made no difference: 

In short, Gemini’s starting point of a 25 percent royalty had no relation to the facts of the case, and as such, was arbitrary, unreliable, and irrelevant. The use of such a rule fails to pass muster under Daubert and taints the jury’s damages calculation. Opinion at 47

The court specifically reaffirmed use of the Georgia Pacific factors as an analytical tool in determining a reasonable royalty rate but emphasized that “there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case.”
The Court also rejected Uniloc’s use of the “entire market rule” as a “check” to show how the royalty rate  arrived at using the 25% rule was "reasonable." In rejecting the use of the entire market value rule in this case, the Federal Circuit again emphasized that “damages based on the entire market value of the accused product [are appropriate] only where the patented feature creates the ‘basis for customer demand’ or ‘substantially create[s] the value of the component parts.’” The court found that Uniloc had offered no evidence that customer demand was driven by the patented software registration feature.


The elimination of the 25% rule may make the damages analysis more complicated in many cases, especially for plaintiff's experts seeking an easy way to justify a high valuation for a particular patent. It will, however, help to insure that the royalty rates that are offered by damages experts are based on facts that are applicable to the case at hand and are rationally based on the value of the patented invention.