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.