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.

Some Things To Watch For In 2011

With 2010 winding down, it’s a good time to look ahead a bit and see what 2011 may have in store for us folks practicing IP law.




False Marking Cases



In 2010, we saw the surging tide of false marking cases. This cause of action, that was asserted less than a dozen or so times leading up to 2010, was the basis for over 600 cases filed during the year. What could 2011 bring?  Probably, more of the same, but some potential changes may help:



• In In re BP Lubricants USA Inc., BP Lubricants filed a petition for a writ of mandamus to the Federal Circuit seeking to overturn the denial of its motion to dismiss the complaint for failing to sufficiently plead intent. The complaint had allegations that many of us are all too familiar with now, including vague allegations that “’upon information and belief,’ that defendant is a ‘sophisticated company’ which ‘knows, or should know’ that the patent at issue had expired.” (DOJ Brief In Support of Petition at 4.). In a somewhat surprising move, the Department of Justice (“DOJ”) filed an amicus brief in support of BP’s petition. The DOJ's brief urges the Federal Circuit to hold that the intent element of a false marking action needs to satisfy the heightened pleading requirement of Fed. R. Civ. P. 9(b) and that under this standard, the complaint in the BP case is insufficient as a matter of law.



The BP case squarely presents the question of the requirements for pleading a false marking case. If the Federal Circuit adopts the position urged by BP and the DOJ, in 2011 defendants will have valuable precedent to use in seeking early dismissal of a large number of the false marking “troll” cases that are supported by nothing more than bland, generic allegations of what a company “should know” about its expired patents.



• In 2010, several legislative proposals were made that would have effectively ended the majority of false marking cases. These proposals were lumped in with patent reform legislation which stalled in Congress. Will 2011 include a legislative solution to the false marking problem?



Patent Reform Legislation

• In 2010 (as in many years prior), it looked like progress was being made on patent reform legislation and there was some momentum in Congress for a patent reform bill. During IPO’s annual meeting in September, one Congressional staffer even suggested that a vote on the pending bills was possible in 2010. That didn’t happen. Will 2011 be the year that patent reform legislation finally makes it through Congress?



The Supreme Court

• As noted in an earlier post, the Supreme Court has taken up three patent cases for its current term. Clearly, the most significant of these cases is Microsoft v. i4i which has the potential to fundamentally alter patent litigation by changing the standard of proof required to establish patent invalidity. A change from the “clear and convincing” standard to the “preponderance of the evidence” standard would greatly impact all phases of patent litigation, from pre-filing due diligence through trial and appeal. This is clearly poised to be the most significant event in patent law in 2011! Then again, many thought that Bilsky had that same potential, and looking back now, we know that didn’t happen.  Only time will tell.



The stage is set for 2011 to be an interesting year for patent law.

I hope that everyone has a very Happy New Year and that 2011 brings excitement, fun and prosperity to all!

The Supreme Court is Set to Significantly Re-Shape Patent Rights and Litigation

The Court Agrees to Hear Three Patent Cases in 2011

The Supreme Court has agreed to hear three patent cases in its upcoming term. The first case touches upon the standard for establishing intent in the context of inducement of infringement. In October, the Supreme Court granted certiorari in Global-Tech Appliances Inc. v. SEB S.A. on the question of “whether the legal standard for the ‘state of mind’ element of a claim for actively inducing infringement under 35 U.S.C. 271(b) is ‘deliberate indifference of a known risk’ that an infringement may occur or instead ‘purposeful, culpable expression and conduct’ to encourage an infringement.” The difference in these standards, essentially the difference between “known” and “should have known,” will significantly effect the way that businesses deal with third party patents from the point of conducting clearance searches and obtaining opinions all the way through trial.


The second case on the Supreme Court docket is Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems. In this case, the Supreme Court will consider ownership rights to inventions that were made with government funding under the Bayh-Dole Act. Although this case addresses a fairly narrow question, it could prove to be a significant case to universities and research institutions which rely heavily on federal research grants to sponsor wide ranging research projects which are the source of many inventions.


The third case, Microsoft v. i4i Ltd. 10-290, could prove to have a fundamental impact on every patent case, as it deals with the core issue of the burden of proof for establishing invalidity of a patent claim.


On November 29, 2010, the Supreme Court granted Microsoft’s petition for a writ of certiorari on the question “did the court of appeals [for the Federal Circuit] err in holding that Microsoft’s invalidity defense must be proved by clear and convincing evidence?”  As noted in a previous posting, Microsoft's petition was supported by numerous amici.

 At trial, Microsoft’s invalidity defense was based on a lack of novelty due to a prior sale of the patentee’s own earlier software. This prior art was not before the patent office during examination and was not considered by the patent examiner. Despite the fact the patent office never had the opportunity to consider this prior art, the patent benefited from the “presumption of validity” and the district court (bound by Federal Circuit precedent) rejected Microsoft’s request for a jury instruction seeking to prove invalidity only by a “preponderance of the evidence." The Federal Circuit affirmed, setting the stage for Microsoft's petition.

The Microsoft case has the potential to significantly change the nature of patent litigation and level the playing field between plaintiffs and defendants. If the Supreme Court reduces the burden of proof for proving invalidity on issues that were not before the patent examiner to a preponderance of evidence, defendants will face a far less daunting task in establishing a successful invalidity defense. Considering the less stringent standard for establishing obviousness under the Supreme Court’s holding in KSR, lowering the burden of proof required to establish an invalidity defense would certainly reduce perceived strength of every issued patent.

Another False Marking Case Bites The Dust

False Marking Case Dismissed With Prejudice for Failure to State a Claim under Rule 12(b)(6)

In Shizzle Pop, LLC v. Aviva Sports, Inc. et al., Judge Klausner dismissed Shizzle Pop’s claims for false patent marking, with prejudice. 10-CV-02574 (C.D. Cal., Order dated Nov. 3, 2010. D.I. 54).  Following a first successful motion to dismiss, the plaintiff was given leave to amend its complaint to plead facts that would “state with particularity the ‘intent to deceive’ element of Section 292.” Order at 1. Plaintiff filed an amended complaint, which had a number of generalized allegations based on “information and belief.” Ruling on defendants’ motion to dismiss the amended complaint, the court found that “plaintiff has lengthened its conclusory statements, but still fails to allege any facts or information that supports its ‘beliefs.’” Order at 4. The court further found that the complaint

“…contains no information supporting the belief that Defendants were acting with an intent to deceive. Further factual detail is needed to survive a motion to dismiss under Rule 9(b). For this reason, the Court grants Defendant’s motion to Dismiss for failure to state a claim with prejudice.”  Order at 4.

Congratulations to my Dorsey partner Tom Vitt and his team for a job well done!

Microsoft, and a Large Group of Powerful "Friends," Ask The Supreme Court to Eliminate the Clear and Convincing Evidence Standard for Patent Invalidity

In Microsoft Corp. v. i4i, U.S., No. 10-290, Microsoft is seeking certiorari on the question of whether the "clear and convincing" standard is appropriate in challenging patent validity in civil litigation. For most issues in civil litigation, such as the question of patent infringement, the party asserting the claim only needs to meet the lower “preponderance” standard. The question then, is why should patent validity be treated differently between private litigants, and should this always be the case?  For example, if the presumption of administrative correctness and deference to the USPTO are the justifications for the heightened evidentiary standard, why should the heightened standard apply when the prior art used to challenge a patent’s validity was not considered by the examiner during prosecution? These and other questions are being addressed by a powerful collection of amici that have submitted eleven briefs supporting Microsoft’s bid for high court review of this fundamental question of patent law.


As reported by BNA, the list of amici and their counsel include:

• 36 law, business, and economics professors, filed by Mark A. Lemley of the Stanford Law School;

• Acushnet Co., General Motors LLC, Pregis Corp., and SAP America Inc., by James W. Dabney and John F. Duffy of Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C.;

• Apple Inc., by Deanne E. Maynard of Morrison & Foerster, Washington, D.C.;

• CTIA—The Wireless Association, by Michael K. Kellogg of Kellogg, Huber, Hansen, Todd, Evans & Figel, Washington, D.C.;

• Electronic Frontier Foundation, Public Knowledge, the Computer & Communications Industry Association, and the Apache Software Foundation, by Michael Barclay of the EFF, San Francisco;

• Facebook Inc., Intuit Inc., Netflix Inc., Newegg Inc., Toyota Motor Corp., and Trimble Navigation Ltd., by John D. Vandenberg of Klarquist Sparkman, Portland, Ore.;

• Google Inc., Verizon Communications Inc., Dell Computer Corp., Hewlett-Packard Co., HTC Corp., and Wal-Mart Stores Inc., by Paul D. Clement of King & Spaulding, Washington, D.C.;

• Intel Corp., by Dan L. Bagatell of Perkins Coie Brown & Bain, Phoenix;

• The Securities Industry and Financial Markets Association and the Clearing House Association, by John A. Squires of Chadbourne & Parke, New York;

• Teva Pharmaceuticals USA Inc., the Generic Pharmaceutical Association, and Cisco Systems, by Henry C. Dinger of Goodwin Procter, Boston; and

• Yahoo! Inc., by William C. Rooklidge of the Howrey law firm in Irvine, Calif.


This is clearly an issue that is worthy of attention as the outcome could represent a fundamental change in patent law.  i4i’s responsive brief is due on October 29, 2010, and a second wave of amicus briefs in support of the clear and convincing standard will likely follow.