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Federal Circuit Holds IPR Proceedings on Pre-AIA Patents is Not an Unconstitutional Taking Under the Fifth Amendment

Posted in IP, Patent Law

In CELGENE CORPORATION v. PETER, the Federal Circuit recently affirmed the PTAB’s decisions finding appealed claims obvious. However, more importantly, the Federal Circuit also held that the retroactive application of IPR proceedings to pre-AIA patents is not an unconstitutional taking under the Fifth Amendment.

Regarding the constitutional issue of whether the retroactive application of IPRs to pre-AIA patents is an unconstitutional taking, the Federal Circuit noted that The Supreme Court left open this challenge with
the following passage near the end of its decision in Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 138 S. Ct. 1365, 1379 (2018) as follows: “Moreover, we address only the precise constitutional

challenges that Oil States raised here. Oil States does not challenge the retroactive application of inter partes review, even though that procedure was not in place when its patent issued. Nor has Oil States raised a due process challenge. Finally, our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause.”

The Takings Clause of the Fifth Amendment states that private property shall not “be taken for public use, without just compensation.” A valid patent is private property for the purposes of the Takings Clause. Celgene thus argued that the retroactive application of IPRs to their pre-AIA patents without just compensation is an unconstitutional taking under the Fifth Amendment. Specifically, Celgene advanced a regulatory takings theory and argues that subjecting its pre-AIA patents to IPR, a procedure that did not exist at the time its patents issued, unfairly interferes with its reasonable investment-backed expectations without just compensation.

The PTO responded on two fronts. First, the PTO argued that when the PTAB finds claims unpatentable in an IPR, it does not effectuate a taking under the Fifth Amendment because the patent owner “never had a valid property right because the patent was erroneously issued in the first instance.” Second, the PTO argued that Celgene’s takings claim fails “because patents have been subject to reconsideration and cancellation by the USPTO in administrative proceedings for nearly four decades, and Celgene’s own patent[s were] issued subject to this administrative revocation authority.” And, the PTO maintains that the AIA “merely revised the procedures by which [the] USPTO conducts these administrative proceedings” and that the procedural differences therefore do not effect a Fifth Amendment taking.

In determining whether the retroactive application of IPRs to pre-AIA patents is an unconstitutional taking, the Federal Circuit first considered the effect that doing so has on the patent right granted by the PTO, and specifically whether IPRs differ from the pre-AIA review mechanisms significantly enough, substantively or procedurally, to effectuate a taking. The Federal Circuit concluded that they do not.

The Federal Circuit also noted that the validity of patents has always been subject to challenge in district court. And for the last forty years, patents have also been subject to reconsideration and possible cancellation by the PTO. The Federal Circuit reasoned that IPRs do not differ significantly enough from preexisting PTO mechanisms for reevaluating the validity of issued patents to constitute a Fifth Amendment taking.

Celgene’s pre-AIA patents were therefore granted subject to existing judicial and administrative avenues for reconsidering their validity. Not only were they subject to challenge in district court, “[f]or several decades, the Patent Office has also possessed the authority to reexamine—and perhaps cancel—a patent claim that it had previously allowed.” In this case it thus sufficed that IPRs do not differ sufficiently from the PTO reconsideration avenues available when the patents here were issued to constitute a Fifth Amendment taking.

In sum, Patent owners have always had the expectation that the validity of patents could be challenged in district court. For forty years, patent owners have also had the expectation that the PTO could reconsider the validity of issued patents on particular grounds, applying a preponderance of the evidence standard. Although differences exist between IPRs and their reexamination predecessors, those differences do not outweigh the similarities of purpose and substance and, at least for that reason, do not effectuate a taking of Celgene’s patents.

Thus, the Federal Circuit held that the retroactive application of IPR proceedings to pre-AIA patents is not an unconstitutional taking under the Fifth Amendment. However, as noted, it is still possible the Supreme Court may weigh in on this issue before too long.

Ninth Circuit Inquiry on Non-Competes Could Have Huge Implications

Posted in IP

The Ninth Circuit recently asked the California Supreme Court to provide it with guidance concerning certain types of non-compete provisions that could have huge ramifications for California’s business environment.  In essence, the Ninth Circuit asked the California Supreme Court whether section 16600 of the California Business and Professions Code bars agreements between businesses that place a restriction on one business from doing business with another.  Depending on how the California Supreme Court answers the inquiry, the result could have a massive impact on a wide range of agreements in California such as franchise agreements, manufacturer/distributor agreements, joint ventures, etc.

When cases are brought in federal court concerning state law, the federal court is often required to look to case law from that state to determine how a state court would rule on the law at issue.  If there is insufficient guidance from the state courts on a particular issue, then a federal court, such as the Ninth Circuit Court of Appeals can “certify” an issue to that state’s highest court in order to obtain guidance on how it should rule in the particular matter before it. This is the procedural mechanism by which the Ninth Circuit in the case, Ixchel Pharma, LLC v. Biogen, Inc., recently certified the following issue to the California Supreme Court: “Does section 16600 of the California Business and Professions Code void a contract by which a business is restrained from engaging in a lawful trade or business with another business?”

In other words, does the prohibition set forth in section 16600 on non-competes apply beyond the employer-employee context?

By way of background, Ixchel Pharma is a biotechnology company that is involved in the development of drugs used to treat mitochondrial disease.  It was working on a drug containing dimethyl fumarate that it hoped could be used to treat Friedreich’s Ataxia, a rare neurological disease.

In January 2016, to further its development efforts, Ixchel entered into a Collaboration Agreement with a Danish company, Forward Pharma.  Under the terms of that agreement, the two companies would work together to develop a new dimethyl fumarate drug and the agreement set forth the parties’ respective obligations with regard to clinical trials, manufacturing and marketing the new pharmaceutical drug.  Ixchel was to receive a percentage royalty based on the sale of the new drug when it was approved for market.  The Collaboration Agreement also allowed Forward to terminate the agreement upon 60 days written notice.

Later in 2016, Forward began negotiations with a different pharmaceutical company, Biogen, to settle a dispute between the two companies. Ixchel alleges that during those negotiations, Forward improperly shared a copy of the Collaboration Agreement with Biogen and Biogen concluded that the development of the new drug could harm its own sales.  As part of the negotiations, Biogen is alleged to have requested Forward terminate its Collaboration Agreement with Ixchel.  In January 2017, Forward and Biogen entered into an agreement by which Biogen agreed to pay Forward $1.25 billion and Forward agreed to terminate its relationship with Ixchel.  Section 2.13 of the agreement between Forward and Biogen provided, “Ixchel.  Each of the Additional Parties and [Forward] shall, and shall cause of each of its respective controlled Affiliates to, terminate any and all existing, and not enter into any new, Contracts or obligations to Ixchel Pharma, LLC … to the extent related to the development of any of the Additional parties, [Forward] or any of their respective controlled Affiliates of any pharmaceutical product having dimethyl fumarate as an [active pharmaceutical ingredient] for the treatment of a human for any indication, including Friedreich’s Ataxia.”  After entering into the agreement, Forward sent written notice to Ixchel that it was terminating the Collaboration Agreement.

Ixchel filed suit in federal court against Biogen claiming that it was liable for tortious interference with contract, intentional/negligent interference with prospective economic advantage and violations of California’s unfair competition law.  The district court dismissed the complaint with leave to amend, concluding that Ixchel had failed to state a claim because it had not alleged that Forward had engaged in any independently wrongful act in entering into its agreement with Biogen.

Ixchel filed an amended complaint to allege that Forward, by entering into the agreement with Biogen that contained section 2.13, violated section 16600 of the Business and Professions Code and its prohibitions on non-competes.  Once again, the district court disagreed with Ixchel and dismissed the claims finding that Ixchel had again failed to allege an independent wrongful act.  Ixchel appealed the decision to the Ninth Circuit which, after briefing, decided to certify the above question to the California Supreme Court.

The Ninth Circuit’s certification request began by recognizing that historically California allowed contractual restrains on a profession or trade “as long as they were reasonably imposed.”  However, this view changed in 1872 when California, in support of its strong public policy favoring open competition, adopted the law that became section 16600 of the Business and Professions Code, which provided a broad right for individuals “to pursue any lawful employment and enterprise of their choice.”  In 2008, the California Supreme Court, in Edwards v. Arthur Andersen, LLP, recognized that under this broad right, “an employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business, unless the agreement falls within one of the exceptions to the rule” [i.e., concerning the sale of a business, partnership or LLC interest].  The Ninth Circuit held that in its Edwards decision, the California Supreme Court was rejecting prior Ninth Circuit case law that had recognized a “narrow restraint” exception to section 16600, which allowed for non-compete provisions if they barred an individual “from pursuing only a small or limited part of the business trade or profession.”

In 2015, the Ninth Circuit decided Golden v. California Emergency Physical Medical Group, which involved the incorporation of a provision into a settlement agreement between a terminated employee and his former employer that operated in essence as a non-compete.  In holding that that provision could violate section 16600, the Ninth Circuit recognized that “because the California Supreme Court `has articulated a broad understanding of what constitutes a void contract under section 16000,’ we concluded that the prohibition imposed by section 16600 extended to all `contractual restraints on professional practice’ between employers and employees.”

The Ninth Circuit continued by recognizing that neither it nor the California Supreme Court had decided an issue involving whether section16600 extends to agreements beyond the employee/employer relationship such as to contractual restraints on business operations. Ixchel argued to the Ninth Circuit that nothing in the plain language of section 16600 prevented it from being applied to such agreements.  The Ninth Circuit recognized that section 16600 referenced the term “anyone” which was not defined.  However, it could be interpreted to mean “any person,” which was well settled under numerous other California laws that “person” could include a corporation, partnership or other business entity.

Ixchel urged the Ninth Circuit to read section 16600 broadly in light of the Edwards decision “to bar any contracts restraining a business from engaging in a lawful business.”  Because section 2.13 of the agreement between Forward and Biogen prevented Forward from entering into a business relationship with Ixchel, it claimed it violated section 16600 of the Business and Professions Code.

Biogen, on the other hand, urged the Ninth Circuit to limit the applicability of section 16600 to the employment context.  First, it argued that applying section 16600 more broadly “would be contrary to the rule of reason in the federal antitrust context and invalidate ordinary commercial restrictions in contracts.”  For instance, adopting such a broad reading of section 16600 would place in jeopardy exclusive dealing agreements and agreements between manufacturers and its dealers limiting the geographic location in which the dealers could sell the manufacturer’s products.  Other legal commentators have noted that a broad interpretation of section 16600 could put at risk “every joint venture, lease, distribution agreement, license agreement and many other widely used business agreements.”  (Citing, Perry & Howell, “A Tale of Two Statutes: Cipro, Edwards, and the Rule of Reason,” 24 Competition: J. Anti., UCL & Privacy Sect. St. B. Cal. 21-22 (2015).)  Biogen argued that California’s legislature could not have intended such a drastic impact that would result from such a broad application of section 16600.

As a result of these competing arguments, and in light of the fact that there had been no prior California Supreme Court guidance on this issue, the Ninth Circuit certified this very important issue to the California Supreme Court before it would take up the merits of Ixchel’s appeal.  The California Supreme Court could always decline to review the certified question presented, but it is unlikely to do so in this case given the potential stakes at issue. We expect the California Supreme Court to act on this issue by mid-2020. If the California Supreme Court accepts certification and agrees with Ixchel as to a broad reading of section 16600 beyond the employer/employee context, all companies doing business in California should consult with legal counsel about reviewing and/or drafting agreements to ensure compliance with this potentially new reading of section 16600.

Do Your Homework Before Suing for Patent Infringement!

Posted in IP, Patent Law

The federal patent laws provide for an award of attorneys’ fees to the prevailing party in exceptional patent infringement cases.  35 U.S.C. §285.  An exceptional case is determined based on the totality of the circumstances.  A case can be exceptional due to a substantive legal position taken by a party or a party’s unreasonable litigation tactics.  Courts can and will award attorneys’ fees to a prevailing defendant if the plaintiff was not justified in filing a patent infringement suit in the first place by failing to conduct a proper investigation of infringement before filing suit.

ThermoLife International LLC v. GNC Corp., 922 F.3d 1347 (Fed.Cir. 2019) is a recent example of this.  The District Court for the Southern District of California awarded the defendants their attorneys’ fees because the plaintiffs did not adequately investigate the issue of defendants’ infringement before suing them.

Stanford University licensed four patents to ThermoLife.  The patents covered compositions of amino acids and a method of use to promote vascular function and performance in humans.  In 2013, ThermoLife and Stanford filed 81 lawsuits for patent infringement against multiple defendants, including Hi-Tech Pharmaceuticals, Inc., Vital Pharmaceuticals, Inc., and several GNC entities.  The plaintiffs alleged that the defendants infringed the patents by making and selling the patented compositions and by performing the patented methods by treating humans directly, and by inducement through their labeling and advertising.

The cases were consolidated for pretrial procedures.  The parties agreed to conduct discovery in phases, with claim construction, invalidity, and unenforceability to be done before infringement and damages.  Many of the defendants settled with plaintiffs for small amounts of money.

In 2016, the cases against Hi-Tech, Vital, and the three GNC entities were consolidated for a bench trial on invalidity.  At trial, the district court held that all of the claims of the patents were invalid as either anticipated or obvious.  Because of the holding of invalidity, the issue of infringement was never addressed – there was no trial on infringement and there had been no discovery on infringement.

After trial, Hi-Tech and Vital filed motions for their attorneys’ fees under 35 U.C.S. §285.  The defendants argued that their products did not infringe because they had less than the claimed amounts of the amino acids and because studies (published before the plaintiffs filed suit) showed that the amounts contained in the defendants’ products were not enough to provide the claimed vascular benefits.  The defendants pointed out that the plaintiffs’ own expert had acknowledged the conclusions of the published studies.  The defendants contended that had the plaintiffs read the labels on the defendants’ products and performed simple tests, they would have known that there was no infringement.

The plaintiffs did not disagree with the defendants’ points, but only argued that they did not file the suits just to force the defendants to settle for nuisance value.

The district court granted defendants’ motions for attorneys’ fees.  The court found that plaintiffs “had conducted an inadequate pre-filing investigation, resulting in objectively unreasonable infringement contentions.” Id. at 1355.  The plaintiffs had not read the defendants’ product labels and had not conducted basic testing.  The court also found that the plaintiffs had exhibited a pattern of filing many lawsuits “without carefully reviewing their claims as a calculated risk that might yield nuisance-value settlements” and settling with a lot of defendants for small, nuisance-value amounts.  Id.  The court stated: “plaintiffs’ pre-filing investigation was severely lacking, thus resulting in frivolous claims and the objective unreasonableness of certain infringement contentions; [plaintiffs’] motivation was seemingly to extract nuisance-value settlements from a large number of defendants; [and] awarding fees here will advance compensation – and deterrence-oriented goals.” Id.  The court awarded Hi-Tech $903,890 and Vital $406,131 in attorneys’ fees.

On appeal, the Federal Circuit Court of Appeals affirmed the district court’s judgement.  The appellate court held that the district court had not abused its discretion in finding the case exceptional, and in awarding fees based on plaintiffs’ lack of inadequate investigations of infringement before filing suit and on the plaintiffs’ pattern of filing suits without a full investigation of infringement. Id. at 1362.

The appellate court held that the fact that the district court based its exceptional case finding on the infringement issue, which had not been fully investigated, was unusual, but was within the discretion of the district court. Id. at 1357.

The appellate court explained that while a plaintiff is not required to test an accused product to determine infringement in order to perform an adequate pre-suit investigation, testing may be necessary depending on factors such as the availability of the products, cost of the testing, and existence of other information. Id. at 1360.  According to the court, the defendants’ products were publicly available and the testing was simple; the plaintiffs should have read the defendants’ product labels and conducted testing of those products whose labels were not clear. Id. at 1361.

The appellate court found that the district court had done a thorough analysis of the exceptional case issue. “The district court, however, did not draw a bottom-line exceptionality conclusion after finishing its discussion of the Hi-Tech and Vital cases.  It continued with its analysis, addressing the full range of cases filed by plaintiffs and finding a ‘pattern of action’ – specifically, a pattern of misconduct – that, together with the discussion tied to the Hi-Tech and Vital cases, supported the ultimate exceptional-case determination.” Id. at 1362.  Emphasizing the deterrence policy of awarding attorneys’ fees in exceptional cases, the court stated that “the ‘pattern’ part of the district court’s opinion thus rests on a finding, which we accept, that plaintiffs’ irresponsible filing of infringement allegations extended widely beyond the two cases before us.”  Id. at 1364.

The holding could not be more clear: always conduct a pre-filing investigation of infringement in a patent infringement case.  Of course, all cases should be thoroughly investigated before filing suit.  It is especially important in patent infringement cases, however, because plaintiffs often want to proceed quickly to stop the infringement.  Infringement must always be analyzed first, even though it may be expensive or time-consuming.

Rule Change Requires U.S. Counsel for Foreign-Domiciled Trademark Applicants

Posted in IP, Trademark Law

The United States Patent and Trademark Office (the “USPTO”) explains that

“A trademark is a brand name. A trademark or service mark includes any word, name, symbol, device, or any combination, used or intended to be used to identify and distinguish the goods/services of one seller or provider from those of others, and to indicate the source of the goods/services.”
https://www.uspto.gov/trademarks-getting-started/trademark-basics.

 

Applying for registration of a trademark with the USPTO provides certain legal advantages to the owner when pursuing infringers. In fact, a large number of U.S. trademark applications are filed by foreign-domiciled applicants whose permanent legal residence or principal place of business is outside the United States. In one of the most significant changes in recent U.S. trademark practice, on July 2, 2019, the USPTO announced that as of August 3, 2019, all foreign-domiciled trademark applicants, registrants, and parties to Trademark Trial and Appeal Board (“TTAB”) proceedings must be represented by an attorney who is licensed to practice law in the United States.

The rule change will take effect in less than two weeks (August 3, 2019) and will apply to all newly-filed applications and other proceedings. However, this rule change is not limited to new actions.  The requirement for U.S. counsel will also apply to other USPTO trademark proceedings that began before August 3, 2019, that still require additional substantive action by the unrepresented party in order to proceed. For example, U.S. counsel will be required when responding to an Office Action.

Previously, foreign-domiciled applicants and registrants, including parties in the TTAB, could act on their own behalf (pro se) or through foreign counsel if they met certain requirements. However, those options are no longer allowed. In addition, Canadian counsel, who previously met the requirements for foreign counsel, can no longer be primary counsel for clients in such proceedings, but they can be secondary counsel for Canadian clients.

Further, the rule change will apply even for the Madrid Protocol, the foreign trademark filing treaty, because the Madrid Protocol filing form at the World Intellectual Property Organization (WIPO) will be amended to add a U.S. attorney before filing and all files will eventually need to designate U.S. counsel.

In addition, the new rule will require U.S. counsel 1) to confirm they are active members in good standing of their bar and 2) to provide their bar information. This requirement is intended to stop or prevent the unlicensed practice of law before the USPTO and prevent the current practice of some who fraudulently copy contact information from legitimate U.S. law firms falsely making it appear the applicant is represented by U.S. counsel.

This rule change will impact tens of thousands of foreign-domiciled individuals and entities who avail themselves of the trademark processes and procedures at the USPTO but is seen by many as necessary to combat the recent increases in fraudulent applications and submission of fake specimens. Speaking at the International Trademark Association annual meeting in May, USPTO Director Iancu stated “In recent years, we’ve seen a significant increase in the number of applicants who are not fulfilling their legal and ethical obligations to file accurately and in good faith, particularly as to claims of use of the mark in commerce. We have seen a surge in improper submissions and bad faith behavior.  Some are domestic, but a significant and increasing number of these come from overseas…. They include submitting fake or altered specimens of use; submitting inaccurate or knowingly false claims of use in U.S. commerce to obtain and maintain registrations; using practitioners who aren’t authorized to represent others before the USPTO; making efforts to circumvent the newly proposed U.S. counsel requirement even before it has been implemented; and making unauthorized address changes and unauthorized assignments of ownership.”

Previously, foreign-domiciled parties who were not represented by U.S. counsel were effectively immune from discipline by the USPTO or any other domestic authority. Worst case, even if a trademark application was fraudulent or fake specimens were submitted, the trademark application was merely denied without further penalty or sanction. With the increasing number and sophistication of those who try to obtain fraudulent trademarks to adversely impact U.S. commercial activity, undermine the reliability of searches, or bring into question the integrity of the trademark registration system, the USPTO has chosen to require foreign-domiciled applicants to retain U.S. counsel who can be held accountable for unethical behavior.

In commenting on the rule change, Director Iancu stated “Businesses rely on the U.S. trademark register to make important legal decisions about their brands. In order to maintain the accuracy and integrity of the register, for the benefit of all its users, the USPTO must have the appropriate tools to enforce compliance by all applicants and registrants.” In addition, the USPTO Commissioner for Trademarks Mary Boney Denison pointed out that “many other countries worldwide have had this requirement for decades.” The USPTO believes “this new rule will help improve the quality of submissions to the USPTO.”

This rule change has been under consideration for several months as a part of a multi-step process to deal with fraudulent applications and fake specimens. For example, just a few days after this announcement, the USPTO issued new examination guidelines related to digital alteration of specimens. The USPTO had previously developed several programs, including guidelines relating to digital alteration of specimens, a pilot program encouraging the public to report fraudulent trademark application material, and a post-registration audit program for certain trademark registrations. In fact, early results from the random audit program showed that over 50% of audited registrations had to delete goods or services because they could not establish proof of use. These changes aim to maintain the reliability and integrity of the U.S. trademark system in light of globalization, treaty obligations, new technologies, and other worldwide developments.

Some have expressed concern that the requirement for U.S. counsel will increase the cost of trademark applications and likely decrease the number of applications. Others are concerned the rule change unfairly discriminates against foreign applicants. However, the increased cost will hopefully be offset by the increased reliability of the U.S. trademark registry. Further, the new rule may serve to protect foreign applicants who currently may be receiving inadequate or false information regarding the legal requirements for obtaining U.S. trademarks because their foreign counsel may not be appropriately knowledgeable as to the U.S. requirements for use of a mark in commerce, USPTO procedures, and/or trademark ownership issues.

The bottom line is that foreign-domiciled applicants should immediately retain U.S. trademark counsel.

Goodbye Majestic Yosemite Hotel, Welcome Back Ahwahnee Hotel

Posted in Intellectual Property Litigation, IP

A few years ago, when the concessionaire for Yosemite National Park (the “Park”), Delaware North, was informed that the Park planned to consider other concessionaires, such as Aramark, Delaware North responded in shocking fashion. Delaware North responded that if it was going to be replaced as the concessionaire, it intended to take the Park’s intellectual property (the “IP”), such as the Ahwahnee Hotel and Curry Village, with it unless it was paid $51 million for the IP. Although the Park disputed Delaware’s claim to the IP, it changed the names of certain venues such as the Ahwahnee Hotel, Curry Village, Badger Pass Skin Run, and the Wawona Hotel. The sites were renamed the Majestic Yosemite Hotel, Half Dome Village, Yosemite Ski and Snowboard Area, and Big Trees Lodge.

When Park Services decided to award the contract to Aramark instead of Delaware North, Delaware North sued Park Services in federal court. Since that time, the matter has been pending in the United States District Court for the Eastern District of California, and the names have been changed as identified above. But it appears that the litigation has finally concluded, with the parties having entered into a $12 million deal between Delaware North, the federal government, and Aramark. The federal government will pay Delaware North $3.8 million and Aramark will pay Delaware North $8.2 million. When Aramark’s contract with Yosemite expires in 2031, the intellectual property assets will transfer to the National Park Service, who will license the IP to the next concessionaire.

This result will bring much joy to those who frequent Yosemite National Park. Those individuals, with some exceptions of course, continued to use the historic monikers such as the Ahwahnee Hotel and Badger Pass to refer to those venues. The name change was viewed with much disdain by lifelong attendees of the Park and others who had developed sentimental attachment to the old names. Although I grew up in Fresno, I never spent much time in Yosemite, but even with my limited exposure, I had trouble accepting the change from Ahwahnee Hotel to Majestic Yosemite Hotel. No offense to the latter name, it just represents an undesirable change to tradition. So if I feel that way, and I was never much of a Yosemite attendee, I can only imagine how frustrated the forced change must have been for Yosemite aficionados.

But the Yosemite and nature aficionados don’t need to concern themselves anymore. With the deal reached by the federal government, Delaware North, and Aramark, the traditional names for the Yosemite venues will return. Now those who frequent Yosemite National Park can put those new names in the rearview mirror and never look back. Tradition is here to stay.

Supreme Court Decision Will Have Huge Economic Impact on Trademark Infringement Damages

Posted in Intellectual Property Litigation, IP, Trademark Law

The Supreme Court has agreed to resolve a circuit split over when a court can order the payment of an infringer’s profits to a successful plaintiff as a measure of damages.  The matter comes to the Supreme Court as an appeal from the Second Circuit decision in Romag Fasteners Inc. v. Fossil Inc. et al.  In that case, the jury at the lower court found that Fossil had infringed Romag’s patent and trademark rights in a magnetic snap closure and made an advisory award that included an award of $6.7 million of Fossil’s profits for trademark infringement.

The judge rejected the jury’s advisory award of Fossil’s profits for trademark infringement based on the lack of a finding of willful infringement.  The lower court’s rejection was affirmed by the Second Circuit.

The determination of when an infringer’s profits are a proper measure of damages depends on the interpretation of 25 USC 1117(a) that was amended in 1999.  The amended Section 1117(a) provides as follows:

When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title, shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled . . . subject to the principles of equity, to recover (1) defendant’s profits . . .

Under Second Circuit precedent in existence prior to the 1999 amendment, a plaintiff had to establish willful infringement in order to recover an award of the defendant’s profits in a trademark action. In Romtag, the plaintiff argued that the 1999 amendment, which added the language “or a willful violation under section 1125(c),” effectively negated the requirement of finding of willful infringement before profits could be awarded for a violation under section 1125(a) because Congress failed to insert the word “willful” in the phrase “a violation under section 1125(a) or (d) of this title.” The trial court and the Second Circuit refused to adopt the plaintiff’s interpretation of the amended provision.

The following Circuit Courts are in agreement with the Second Circuit that a finding of willfulness is required before an award of the defendant’s profits can be made:  the First Circuit, the Eight Circuit, the Ninth Circuit, the Tenth Circuit and the D.C. Circuit.  Of those, only the Tenth Circuit affirmatively maintained its prior willfulness requirement after the 1999 amendment.  In the Tenth Circuit case, Western Diversified Services., Inc. v. Hyundai Motor America, Inc., the court held, because an award of profits is “subject to the principles of equity” and “in light of the punitive nature of such an award and the increased risk of granting plaintiff a windfall, it was appropriate under the statute to require a showing that Defendant’s actions were willful to support an award of profits under 15 U.S.C. § 1117(a).”   Compare that to the Ninth Circuit which characterized the argument that the 1999 amendments abrogated prior case law as a “shaky assumption” but did not affirmatively decide the question.

On the other side of the split are the Third, Fourth, Fifth, Sixth, Seventh and Eleventh Circuits, each of which have interpreted the 1999 amendment to permit an award of the defendant’s profits absent a finding of willful infringement.  In Banjo Buddies, Inc. v. Renosky, the Third Circuit reasoned that in enacting the 1999 amendment, Congress was aware of the large body of case law requiring a finding of willfulness for an award of profits for a violation of section 1125(a), and its failure to add the word “willfulness” to that section of the statute indicated a desire to supersede the judicially created doctrine of requiring willfulness.

Romag petitioned the Supreme Court to hear the case in March 2019.  Romag argued that “a plaintiff’s actual damages are often difficult to measure” and “an award of an infringer’s profits is often the only meaningful monetary relief that trademark owners can secure.”  Romag contends that the willfulness requirement “sets the bar too high, depriving mark holders of an important remedy and failing adequately to deter infringement.”

Federal Circuit Sets Higher Standard for Early Alice Motions

Posted in Intellectual Property Litigation, IP, Web/Tech

In Cellspin Soft, Inc. v. Fitbit, Inc. et. al., the Federal Circuit recently held that a lower court wrongly invalidated four patents under Alice because they contain an inventive concept.  The four patents at issue share the same specification and generally relate to connecting a data capture device, e.g., a digital camera, to a mobile device so that a user can automatically publish content from the data capture device to a website.  Defendants had moved to dismiss the case, arguing that the patents are ineligible for patent protection under 35 U.S.C. § 101.  The district court granted these motions and subsequently awarded attorney fees.  However, the Federal Circuit concluded that the district court misapplied Federal Circuit precedent in granting Defendants’ motions to dismiss, and vacated the district court’s ruling.

The district court had granted Defendants’ motions based on the Supreme Court’s two-step framework for analyzing patent eligibility under Alice.  Step one asks whether the claim at issue is “directed to . . . [a] patent-ineligible concept[],” such as an abstract idea.  If so, a court then proceeds to step two, which the Supreme Court has described as “a search for an ‘inventive concept’—i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself,” or put another way, something more than “well-understood, routine, conventional activities previously known to the industry.”

As to step one, the district court in this case concluded that the asserted claims are directed to the abstract idea of “acquiring, transferring, and publishing data and multimedia content on one or more websites.”  The district court explained that the asserted claims use “generic computer hardware and software components” to automate the conventional, manual process of transferring data from one device to another.  It therefore concluded that Plaintiff failed to show that the data acquisition, transfer, and publication described in the patents represents something more than a simple automation of a conventional (manual) process, i.e., an abstract idea.

As to step two, the district court found that the asserted claims do not recite an “inventive concept.” In particular, the district court concluded that the various claim elements, e.g., the data capture device and Bluetooth enabled mobile device, represent generic computer components performing “as expected according to their ordinary use.” The district court therefore concluded that none of the asserted claims, from any of the asserted patents, were patent eligible.

The Federal Circuit applying this same two-step framework, agreed with the district court that the asserted claims are directed to an abstract idea.  However, the Federal Circuit also found the district court erred with respect to the inventive concept inquiry by ignoring allegations that, when properly accepted as true, preclude the grant of a motion to dismiss.

In regards to step one, the Federal Circuit found the asserted claims are drawn to the idea of capturing and transmitting data from one device to another.  Agreeing with the district court, the Federal Circuit reasoned it has consistently held that similar claims reciting the collection, transfer, and publishing of data are have been found to be directed to an abstract idea. The Federal Circuit then concluded that these cases therefore compel the conclusion that the asserted claims are directed to an abstract idea as well.

Moving on to step two, the Federal Circuit first reasoned that plausible and specific factual allegations that aspects of the claims are inventive can be sufficient to defeat a motion to dismiss when not wholly divorced from the claims or the specification.  Specifically, “[a]s long as what makes the claims inventive is recited by the claims, the specification need not expressly list all the reasons why this claimed structure is unconventional.”  The Federal Circuit then found in this case the Plaintiff made specific, plausible factual allegations about why aspects of its claimed inventions were not conventional, e.g., its two-step, two-device structure requiring a connection before data is transmitted.  The district court erred by not accepting those allegations as true.

Next, the Federal Circuit also reasoned that factual disputes about whether an aspect of the claims is inventive may preclude dismissal at the pleadings stage under § 101.  Here, accepting Plaintiff’s allegations as true, the Federal Circuit could not conclude that the asserted claims lack an inventive concept.  Plaintiff specifically alleged that using HTTP at a specific location, here at the intermediary mobile device, was inventive.  It further alleged that establishing a paired connection before transmitting data was also inventive.  The Federal Cicuit held it had no basis, at the pleadings stage, to say that these claimed techniques, among others, were well-known or conventional as a matter of law.

Moreover, even assuming that Bluetooth was conventional at the time of these inventions, implementing a well-known technique with particular devices in a specific combination, like the two-device structure here, can be inventive.  Plaintiff specifically alleged that its implementation of Bluetooth, using a two-step, two-device structure, was inventive. The same is true for the claimed combination of steps—sharing data only after a certain step is performed, using HTTP at another particular step, etc.  Furthermore, Plaintiff did more than simply label these techniques as inventive.  It pointed to evidence suggesting that these techniques had not been implemented in a similar way.  This sufficiently alleges that Plaintiff has claimed significantly more than the idea of capturing, transferring, or publishing data.  Thus, accepting Plaintiff’s allegations as true, the asserted claims recite a specific, plausibly inventive way of arranging devices and using protocols rather than the general idea of capturing, transferring, and publishing data.

Therefore, the Federal Circuit found the district court erred by not accepting these well-pleaded allegations as true with respect to whether the asserted patents capture, transfer, and publish data in a way that is plausibly inventive.  And, accepting those allegations as true, the Federal Circuit could not say that the asserted claims are ineligible under § 101 as a matter of law. The Federal Circuit therefore vacated the district court’s dismissal and its subsequent award of attorney fees.

This case continues a recent trend of making Section 101 challenges under Alice more difficult to win early in a case.  It also broadens the type of evidence that can be used by patent owners to defeat a patent eligibility motion to dismiss.  Specifically, “plausible and specific factual allegations that aspects of the claims are inventive are sufficient.”  And, “as long as what makes the claims inventive is recited by the claims, the specification need not expressly list all the reasons why this claimed structure is unconventional.”  Finally, this case shows that even five years out from Alice, patent eligibility will still continue to be an evolving body of law.

Web Domains and The Forgotten Tort of Trespass to Chattels

Posted in Intellectual Property Litigation, IP, Web/Tech

California case law over the last few years is replete with instances where a new and/or small business has one of their employees take responsibility for various IT activities such as setting up the company website and/or email domains.  Disputes arise when that employee leaves for other employment and refuses to give the former employer access to the business domain and/or emails.  This is what happened in the recent case, Pneuma International, Inc. v. Cho, which made its way to the California First Appellate District.   The Court was required to analyze an old, but largely forgotten, theory of tort liability, trespass to chattels, in connection with a defendant’s “control” over his former employer’s website domain.

Pneuma supplies paper goods to various distributors and is known for selling a 10-ounce “ripple soup cup” that is used in Kaiser hospitals.  Pneuma employed Yong Kwon Cho and he set up the company’s website domain (www.egpak.com) using his personal yahoo email address and became the registered owner of that domain.  During his employment, the website domain was used as a repository for the company’s business records, including its financial books, contact information for vendors and customers, and purchase orders.

Mr. Cho left Pneuma’s employ approximately one year after creating the website and went to work for a competitor, Central United Packaging, Inc. (“CUP”).  A dispute later arose between Pneuma and CUP, which apparently began after one of Pneuma’s primary customers switched to CUP.  Pneuma demanded that Mr. Cho transfer ownership of the company domain over to Pneuma but the transfer apparently would require Pneuma to shut down its computer system for a period of time with the risk of potential loss of information or data.  While Mr. Cho was willing to have Pneuma substituted in his place as the registered owner of the domain, he did not want to allow Pneuma to have complete access to his personal email account associated with the domain.  As the negotiations between Pneuma and CUP and Pneuma and Cho broke down, Pneuma filed a lawsuit in October 2014 alleging 15 causes of action, including one for recovery of personal property related to the company domain, which the Court later construed as a claim for trespass to chattel.  When the trial began approximately 18 months later, Mr. Cho remained the registered owner of the egpak.com domain.  After a bench trial, the Court found in favor of Pneuma against Mr. Cho on the claim of trespass to chattel and ordered Mr. Cho to transfer the contents of the domain to Pneuma (with the exception of his personal emails). Pneuma lost on other related claims from which it appealed, claiming the trial court had committed error.

In considering Pneuma’s appeal, the First Appellate District Court began by examining the tort of trespass to chattel, which had long been described as the “little brother of conversion.”  In essence, a trespass to chattels occurs when there have been “interferences with possession of personal property ‘not sufficiently important to be classed as conversion, and so to compel the defendant to pay the full value of the thing with which he has interfered.’”  That is, the plaintiff must show a defendant’s interference with the possession of personal property has resulted in injury to plaintiff and the plaintiff “may recover only the actual damages suffered by reason of the impairment of the property or the loss of its use.”  Legal commentators have long recognized that “`trespass remains as an occasional remedy for minor interferences, resulting in some damage, but not sufficiently serious or sufficiently important to amount to the greater tort’ of conversion.”

The appellate court began by reviewing the trial court’s findings as to the trespass of chattels cause of action and concluded that it properly found that: (1) Pneuma owned or had a right to possess the egpak.com domain and its contents; (2) Cho had intentionally interfered with its use or possession of that property by declining to transfer ownership of the domain and its contents to Pneuma; (3) Pneuma did not consent to this interference; (4) Pneuma was harmed by being denied access; and (5) Mr. Cho’s conduct was a substantial factor in causing Pneuma’s harm.  The trial court analogized Mr. Cho’s conduct to someone taking and holding a key to a storage locker, thereby depriving the owner of the property inside the locker from accessing it. Although Pneuma owned the business records that had been loaded onto the egpak.com domain, it was unable to prevent Mr. Cho or anyone else from accessing and viewing its business records since Mr. Cho was the “registered owner” of the domain.  Nevertheless, because Pneuma was still able to access the records in its possession, and Mr. Cho had generally cooperated in keeping the site active, the court found that Mr. Cho’s interference was not substantial and did not amount to conversion.  Because Pneuma could not totally control and protect its business records, the trial court concluded that equitable relief was merited since it would be hard to show or determine what monetary damages should be awarded.

Pneuma argued that the trial court erred in not finding in its favor on its conversion cause of action, which related to Mr. Cho’s exercise of control over the egpak.com domain.  The First Appellate District Court rejected this claim on two grounds.  First, it has long been recognized that conversion does not apply to “’the unauthorized taking of intangible interests that are not merged with or reflected in something tangible.’”  The appellate court affirmed the trial court’s finding that because Pneuma had alleged that its “intangible property,” such as the domain and its computer records had been converted, it could not prevail on a conversion theory.  Furthermore, the trial court had properly found that any interference with the website domain was not substantial, which the appellate court found was also fatal to a conversion cause of action.  Again, because trespass to chattel occurs where there has only been a “minor interference” that does not amount to conversion, the appellate court found that Pneuma’s conversion claim was properly rejected.

Pneuma also appealed the trial court’s ruling against it on its unfair business practices claim under section 17200 of the California Business and Professions Code.  The trial court concluded that because Mr. Cho’s only wrongful conduct was in not transferring ownership of the egpak.com domain to Pneuma, it did not rise to a fraudulent or unfair business practice within the meaning of section 17200.  The appellate court agreed with this conclusion.  First, the Court noted that there had been no legal authority in California that trespass to chattels could give rise to an unfair business practice under section 17200.  Furthermore, Pneuma could not point to any specific California law that the legislature may have “borrowed” for purposes of establishing an unlawful act in violation of section 17200.  Rather, the doctrine of trespass to chattels is an old common law concept.  Finally, the appellate court affirmed the finding that there had been no showing of an unfair or fraudulent conduct in connection with Mr. Cho’s control over the egpak.com domain that would also violate section 17200.  In essence, Pneuma had not established that there had been any unlawful business practice.

To further buttress this finding, the appellate court found that because section 17200 only provides for equitable relief (instead of monetary damages), Pneuma would not have been entitled to anything in addition to what it was already awarded in connection with its trespass to chattel cause of action, i.e., return of the domain to its control.  Thus, the First Appellate District Court affirmed the finding in Pneuma’s favor as to its trespass to chattels cause of action and rejected Pneuma’s appeal as to the other related claims.

The Pneuma case is a good reminder to businesses that they should take the time to review and/or audit their current IT structures, including identifying the registered owners of its domains and who controls access so that it can work with current employees to ensure that control and/or ownership of its web-based assets are transferred back to the company.  Waiting until after an employee has been terminated to try to negotiate the return of such assets can be complicated and pose risk that the company’s web presence could be interfered with and customers shut out and/or redirected.

When is an Invention Obvious?

Posted in IP, Patent Law

To be patentable, an invention must satisfy two key requirements, as determined by the U.S. Patent and Trademark Office (PTO).  First, the invention must be novel.  This means that the same invention cannot have been disclosed in a single prior art reference.  The prior art is all of the publicly available information that existed before the date the patent application was filed.  Second, the invention must not have been obvious to a (hypothetical) person skilled in the art (the field of the invention) based on the prior art.

When a patent application is filed, it is assigned the technical area in the PTO that is closest to the technology of the invention as set forth in the claims.  A patent examiner in that technical conducts a search of the prior art, and examines the claims to determine whether the requirements for patent ability (novelty, nonobviousness, and others) are met.  If requirements are met, the examiner allows the claims.  If the requirements are not met, the examiner rejects the claims.  The patent applicant may then amend the claims and/or argue with the examiner about the merits of the rejections.

To determine whether an invention is obvious, the examiner must analyze and make factual findings on four questions:  (1) what is the scope and content of the prior art? (2) what are the differences between the prior art and the claims? (3) what is the level of ordinary skill in the art? and (4) what, if any, is the evidence of secondary considerations?  In other words, the examiner must decide what the prior is and whether a person skilled in the art would have achieved the claimed invention based on the prior art.

There are several different rationales that the examiner may rely on in making an obviousness rejection.  One of the rationales is that a person skilled in the art would have modified the prior art, based on some motivation or teaching in the reference, to achieve the claimed invention.  When this is the rationale relied upon by the examiner, the examiner must make two additional factual findings: (1) that a person skilled in the art would have had a motivation to combine the prior art references to achieve the claimed invention; and (2) that a person skilled in the art would have had a reasonable expectation of success in doing so.

There are several additional rules established by the PTO or the courts that govern the examiner’s process in determining obviousness based on modifying the prior art.

The examiner cannot use hindsight in determining obviousness.  This means that the examiner cannot use the applicant’s own patent application as a roadmap or template to work backwards to find each element of the claims somewhere in the prior art.

The examiner cannot choose parts of a prior art reference and ignore other parts in the same reference that teach away from the invention (i.e., that suggest the modification would not work).  A prior art reference must be considered as a whole, in its entirety including the parts of the references that teach away from the modification as well as the parts that suggest the modification.

All of the prior art must be considered.  The hypothetical person skilled in the art is deemed to have knowledge of all the references that became public before the date the patent application was filed.  The examiner cannot ignore the references that teach away from modifying the prior as the examiner proposes or teach away from the invention itself.

If the examiner’s rejection is based on a modification that changes the principle of operation of the primary prior art reference, the rejection is improper.  Similarly, if the examiner’s proposed modification would result in the primary reference being unsatisfactory or inoperable for its intended purpose, the rejection is improper.

These are just some of the arguments that a patent applicant can make to overcome an obviousness rejection.  If the arguments don’t work, the applicant can amend the claims to try to overcome the rejection.  Ultimately, the applicant can appeal to the Patent Trial and Appeal Board, and then to the Federal Circuit Court of Appeals, for a court to decide the issue.

Supreme Court: Federal Government Cannot Challenge Patents in PTAB

Posted in Intellectual Property Litigation, IP, Patent Law

The validity of a patent can be challenged in four different types of proceedings: ex parte reexamination, inter partes review, post grant review, and covered business method review. An ex parte reexamination is initiated by any person or by the PTO’s director to request that the PTO internally reexamine the claims of the patent based on prior art.

The other three proceedings were established by the America Invents Act. These proceedings are conducted by the Patent Trial and Appeal Board (PTAB) before a panel of three judges. The proceedings are adversarial; both the patent owner and the party challenging the patent participate in the proceeding.

An inter partes review is a proceeding in which any person other than the patent owner can petition the PTAB to invalidate the patent on grounds of novelty or non-obviousness based on prior art consisting of patents and printed publications.

A post grant review is a proceeding in which any person other than the patent owner can petition the PTAB to invalidate the patent on any grounds. The petition must be filed within nine months of the date the patent issues.

A covered business method review is a proceeding in which any person who has been accused of, or sued for, infringing a business method patent can petition the PTAB to invalidate the patent.

In a 6-3 decision, the Supreme Court decided this past Monday that the U.S. Government cannot utilize the three PTAB proceedings to challenge a patent because the Government is not a “person.” Return Mail, Inc. v United States Postal Service, 2019 U.S. LEXIS 4028(June 10, 2019).

The plaintiff, Return Mail, Inc., owned a patent for a method of processing undeliverable U.S. mail. In 2003, the U.S. Postal Service started to negotiate a license under the patent, but never completed a deal with Return Mail. In 2006, the Postal Service began using a new method to process undeliverable mail, and Return Mail again offered a license. The Postal Service did not take a license, but instead filed a request for ex parte reexamination. The PTO granted the request, but confirmed the patent’s validity.

Return Mail then sued the Postal Service in the Court of Federal Claims to obtain compensation for the Postal Service’s use of its patented method. The Postal Service filed a petition for covered business method review of the patent in the PTAB. The PTAB invalidated the patent on the grounds that it was directed to patent-ineligible subject matter. Return Mail appealed to the Federal Circuit Court of Appeals and the court affirmed the PTAB’s decision. The court held that the Government is a “person” within the meaning of the America Invents Act entitled to file for covered business method review, and that the patent was invalid for the PTAB’s reasons. Return Mail appealed to the Supreme Court.

The issue before the Supreme Court was whether the Government is a “person” within the meaning of the America Invents Act, and therefore entitled to file the three types of proceedings to challenge a patent in the PTAB.

The Court explained that the America Invents Act and the patent statutes do not define a “person.” Without such a statutory definition, the Court relied on the presumption that the term “person” excludes the sovereign (e.g. the Government and its agencies). Given this presumption, the Government had the burden to show that Congress intended to permit the Government to utilize the America Invents Act proceedings to challenge a patent.

The Postal Service argued that the word “person” in the America Invents Act includes the Government because other patent statutes suggest that the Government is a person.
The Court rejected this argument because there was no consistency in the statutes’ useage of “person” to include the Government. The Court said that the fact that the Government or a Federal agency can apply for and own a patent is irrelevant to the issue of whether the Government can utilize the America Invents Act proceedings.

The Postal Service also argued that the Government should be able to utilize the America Invents Act proceedings because the Government is inherently involved in the patent system. In particular, the Postal Service contended that the PTO rules permit federal agencies to challenge patents in ex parte reexaminations before the PTO. The Court was not persuaded by this argument. Without directly addressing the propriety of that conclusion, the Court explained that the PTAB did not exist at the time the patent rules were written, and that the America Invents Act proceedings in the PTAB are significantly different from the PTO’s internal reexamination procedure.

Lastly, the Postal Service argued that it had to be permitted to utilize in the America Invents Act proceedings because it was subject to a civil lawsuit by the patent owner for patent infringement and should have the same rights to challenge the patent as other accused infringers. The Court did not accept this argument, however, finding that the Government had the same rights as patent infringement defendants in litigation, and that America Invents Act proceedings were separate and unrelated.

The Court noted that its holding that the Government was not a “person” entitled to utilize the American Invents Act proceedings provided an additional benefit: a patent owner would not be subject to being challenged by one federal agency in proceedings before another Federal agency.

The effect of this case is that a Government agency, when sued for patent infringement, will have to challenge the patent in the litigation and prove invalidity by clear and convincing evidence. The Government agency will not be able to challenge the patent in the PTAB, where the burden of proof is the lesser standard of a preponderance of the evidence.