A lot of things are patentable. Under 35 U.S.C. §101, machines, articles of manufacture, processes, and compositions of matter (including new chemical compounds) are patentable. But some things are not: the exceptions are laws of nature, natural phenomena, and abstract ideas.

The Federal Circuit Court of Appeals has many times had to decide what these terms mean. To make that determination; the court applies the two-part test set forth set forth by the Supreme Court in Alice Corp v. CLS Bank International, 573 U.S. 208 (2014). First, the court decides if the claims sought to be patented fall within patent-ineligible subject matter, such as abstract ideas. If so, then in a second step, the court decides if the claims contain some element that transforms the abstract idea into patent-eligible subject matter.

In 2016, the Federal Circuit applied the Alice test to decide whether a method of playing a wagering card game was patentable. In re Smith, 815 F.3d 816 (Fed. Cir. 2016). In that case, the court held that the claimed method of playing the card game was similar to the method of mitigating financial settlement risks that was claimed in Alice and the method of hedging risks in consumer transactions that was claimed in Bilski v. Kappos, 561 U.S. 593 (2010).

In 2018, the Federal Circuit decided whether a method of playing a wagering dice game was patentable. In re Marco Guldenaar B.V., 911 F.3d 1157 (2018). In that case, the claims required providing a set of three dice, in which the first die had one face marked, the second die had two faces marked, and the third die had three faces marked; wagering on an outcome where one or more of the marked faces of the dice would appear; rolling the dice; and paying out money if the wager outcome occurred. The patent application had been rejected by the PTO on the grounds that the claims were directed to patent-ineligible subject matter. The PTO found that the claims, for the rules for playing a game, fell within “methods of organizing human activity” and constituted an abstract idea. The PTO also rejected the claims on the printed matter doctrine.

The Patent Trial and Appeal Board affirmed the PTO’s rejections.

The Federal Circuit affirmed the decision of the PTAB, holding that the claims were ineligible as directed to an abstract idea. The court said that the claims for a method of playing a wagering game were similar to the claims that were in rejected in Smith. The court agreed with the PTAB that the claims were the rules for playing a game, and were also a method of organizing human activity. The court explained that rules for playing a game are an abstract idea, but that, under the Alice test, they may be patent-eligible if the claims include an inventive concept that transforms the abstract idea into something more. However, the court found that the steps of placing a wager, rolling the dice, and making a payout on the wagered outcome were merely conventional steps, not an inventive concept. Thus, under Alice, the claims were a patent-ineligible abstract idea.

The court further held that the rejection of the claims on the printed matter doctrine was proper. The applicant had argued that the markings on the dice made the claims patentable. The court held that the markings were printed matter, which is not patentable, because the content of information is not patent-eligible subject matter under §101.

Lastly, the court clarified that the fact that the claims are directed to a physical game is not determinitive. Just because something is physical does not mean that it overcomes the abstract idea exception to patentability. Rules for playing a game may involve physical steps, but they still constitute an abstract idea.

On March 25, 2018, the District Court in Nichia Corporation v. VIZIO, Inc., Case No. 8-16-cv-00545 (CACD 2019-03-25, Order), granted defendant’s motion to preclude plaintiff’s damages expert from testifying that plaintiff should recover, as compensatory damages, its costs incurred in a related Inter Partes Review (IPR) proceedings.  The Court found such testimony would constitute an improper circumvention of 35 U.S.C. § 285’s requirements for an attorney fee award.

35 U.S.C. § 285 authorizes a court to award reasonable attorneys’ fees to the prevailing party in “exceptional cases.”  In Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), the Supreme Court defined an “exceptional case” as one that “stands out from others with respect to the substantive strength of a party’s litigating position . . . or the unreasonable manner in which the case was litigated.”  Under Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014), district courts are to apply a “totality of the circumstances” test to determine whether a case is exceptional.

Moreover, the Federal Circuit recently issued a decision in Stone Basket Innovations, LLC v. Cook Medical LLC that clarified the requirements for litigants seeking attorneys’ fees under 35 U.S.C. § 285.  There, the Federal Circuit found dispositive Cook Medical’s failure to provide “early, focused, and supported notice [to Stone Basket] of its belief that it was being subjected to exceptional litigation behavior.”  According to the Federal Circuit, a “party cannot simply hide under a rock, quietly documenting all the ways it’s been wronged, so that it can march out its ‘parade of horribles’ after all is said and done.”  Indeed, where there is no indication of willful ignorance or failure to assess the soundness of pending claims, post-judgment notice of its assertion that the claims were always baseless cannot mandate an award of fees under a “totality of the circumstances” analysis.

Here, Plaintiff Nichia initiated the instant action on March 23, 2016, alleging that certain televisions of Defendant VIZIO infringe four of its patents directed to light emitting diode (“LED”) semiconductor chips and phosphor materials that are combined to produce white light.  The asserted patents (1) list the same four inventors; (2) share a common specification; and (3) claim priority to the same Japanese patent application, P 09-081010, and the same U.S. Patent Application No. 08/902,725, which issued as U.S. Patent No. 5,998,925 on July 29, 1997.

Before trial VIZIO moved to preclude Nichia’s damages expert from testifying that Nichia should recover, as compensatory damages, its costs and fees “for defending the validity challenge to the patents-in-suit at the patent office.”  VIZIO argued Nichia’s attempts to do so were “an end run around the strict requirements for attorney’s fees under Section 285 of the Patent Act” and is directly contrary to law.  In his expert report, Plaintiff Nichia’s expert states:

I have been informed by Counsel that as a result of VIZIO’s infringement of Nichia’s patents-in-suit by the accused TVs, Nichia initiated this lawsuit. VIZIO then decided to initiate a separate proceeding at the patent office in which it challenged the validity of the patents-in-suit… I understand that the cost to Nichia for defending the validity challenge to the patents-in-suit at the patent office was approximately $800,000…[T]he total damages amount should be adjusted upward by approximately $800,000 to account for this additional damage….

Nichia contended that these costs and fees are proper damages under § 284, arguing that this section simply provides that a court should “award the claimant damages adequate to compensate for the infringement . . . in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.”  However, the Court found that the expert’s inclusion of attorneys’ fees in his calculated reasonable royalty rate is improper.

The Court reasoned that the Federal Circuit’s opinion in Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572, 1581 (Fed. Cir. 1996), addressed a similar question and was instructive.  In that case, the district court awarded litigation expenses to a prevailing plaintiff as part of its royalty rate.  But, the Federal Circuit reversed, explaining that in sections 284 and 285, the Patent Act sets forth statutory requirements for awards of enhanced damages and attorney fees. The statute bases these awards on clear and convincing proof of willfulness and exceptionality.  At no point does it suggest allowing enhancement of a compensatory damage award as a substitute for the strict requirements of these statutory provisions.

The Court here reached a similar conclusion, reasoning “the American Rule is a ‘bedrock principle’ of this country’s jurisprudence. It provides that, in the United States, ‘[e]ach litigant pays his own attorney’s fees, win or lose. The American Rule may only be displaced by an express grant from Congress.” (citations removed). The statute at question here, 35 U.S.C. § 284, contains no such express grant from Congress. Instead, Congress has provided for attorneys’ fees only in “exceptional cases.”

Thus, the court found that to the extent that Plaintiff believes it is entitled to recover its attorneys’ fees, it cannot do so simply by lumping it into its compensatory damages, but must instead meet the more stringent requirements of 35 U.S.C. § 285.  Therefore, the court granted VIZIO’s motion to exclude Plaintiff Nichia’s expert from testifying about the costs and attorney’s fees incurred in the related IPR.

The Supreme Court has granted review in the matter known as Mission Product Holdings Inc. v. Tempnology LLC, No. 17-1657, where it will decide whether a licensee loses its right to use a licensed trademark if the licensor files bankruptcy and the bankruptcy trustee chooses to reject the licensor’s license agreement. This decision could significantly impact numerous licensees throughout the world if the Court affirms the First Circuit Court of Appeal’s decision below, holding that a licensee loses its right to use a licensor’s trademarks once the licensor has filed a petition for bankruptcy and the trustee has elected to reject the agreement pursuant to Section 365(a) of the Bankruptcy Code.

Under Section 365(a) of the Bankruptcy Code, a bankruptcy trustee can assume or reject a debtor’s pre-bankruptcy executory contracts, depending on whether the benefits of continued performance outweigh the burdens to the bankruptcy estate. Under that provision, a rejection is treated as a breach by the debtor if certain conditions are met. If those conditions are met, the other party to the agreement is entitled to file a claim for damages in the bankruptcy action, however valueless that may be.

The Bankruptcy Code, however, does not address the matter at issue before the Supreme Court, which is whether rejection of a trademark license agreement strips the licensee of the right to use the mark. Although Section 365(n) protects the rights of “intellectual property” licensees, the Bankruptcy Code’s definition of “intellectual property” does not expressly include trademarks. While most trademark practitioners would be dumbfounded if a court were to interpret “intellectual property” in a manner that doesn’t include trademarks, the First Circuit did exactly that.

Accordingly, the Supreme Court has granted review to resolve a circuit split between the First Circuit, whose holding is discussed above, and the Seventh Circuit, which held that a licensee’s trademark rights survive rejection of the agreement in bankruptcy. See Sunbeam Prods. v. Chi. Am. Mfg., 686 F.3d 372 (7th Cir. 2012). This case has caused numerous IP groups, as well as the United States Government, to file amicus briefs. Interestingly, the U.S. Government has stated that a trademark owner cannot revoke a licensee’s right to use the trademark by rejecting its license agreement under the Bankruptcy Code’s contract rejection mechanism.

Similarly, Mission Product Holdings, the petitioner in this case, has urged the Court to reject the First Circuit’s holding in favor of the Seventh’s, arguing that, “[a]s the great majority of courts and scholars have recognized, rejection is not a special bankruptcy power to terminate or rescind a contract.” It also does not “allow the trustee to revoke interests in property that the debtor granted to a counterparty under the contract before bankruptcy.”

In contrast, Tempnology, the opposing party, contends the First Circuit made the correct decision. Specifically, Tempnology argues, “The Bankruptcy Code’s strong policy of permitting a debtor to free itself of ongoing obligations under a contract … and the right to reject such obligations applies to the burden of policing trademarks.” As such, Tempnology argues, the First Circuit was correct that a licensee’s right terminate upon rejection.

But this issue was addressed by the American Intellectual Property Law Association’s (“AIPLA”) amicus brief, wherein the AIPLA urged the Court to hold that a licensee’s rights outside of the bankruptcy context govern whether the licensee’s rights survive the licensor’s rejection under the Bankruptcy Code. The AIPLA argues that in the “absence of the Bankruptcy Code specifically addressing trademark licenses, the effect of the breach must be decided under applicable non-bankruptcy law and the language of the contract.” The AIPLA rejected the First Circuit’s rationale that a licensee’s right must terminate in order to avoid restricting a licensor-debtor’s right “to free itself from performing executory obligation” by forcing it to police its marks. The AIPLA contends the First Circuit’s approach was flawed because the duty to monitor a trademark’s use does not arise under the terms of a license agreement, but is instead an independent obligation imposed by federal trademark law.

The United States Government may have said it best: “If a landlord has rented a family an apartment and has agreed to pay the utilities, the landlord cannot later terminate the family’s lease simply by refusing to pay the cable bill[.]” The same principles apply, or at least they should, to trademark licensing agreements. For that reason, among others, I suspect the Supreme Court will overturn the First Circuit’s decision and protect the rights of the licensees.

 

Intellectual Property Law Blog contributor Josh Escovedo was recognized this week as a Top Author for the topic of trademarks in the JD Supra 2019 Reader’s Choice Awards.

Josh Escovedo practices in Weintraub’s Litigation and Intellectual Property sections.  He counsels and advises clients in a variety of litigation matters with an emphasis on intellectual property, commercial, and real estate litigation. Josh also provides his intellectual property clients with advice and counsel regarding trademark and copyright usage, registration, acquisitions, and transfers.

Josh writes frequently for this blog, on a wide range of IP topics.   His topical and accessible posts about developments in trademark law are the body of work recognized by JD Supra.  He also regularly publishes articles concerning copyright law.

JD Supra delivers need-to-know legal and business content to professionals on multiple platforms across the web. The Readers’ Choice Awards recognize top authors and firms who were read by C-suite executives, in-house counsel, media, and other professionals across the JD Supra platform during 2018. The awards recognize authors for their visibility and thought leadership covering 26 key, cross-industry topics, including trademarks. Editors chose the topics covered in this year’s Readers’ Choice Awards for their timeliness, as well as their proven, ongoing importance. In each category, ten authors and one firm were recognized for consistently having the highest readership and engagement within that category for all of 2018. Across all categories and 50,000 contributors, 228 authors were recognized for excellence and achievement.

 

JD Supra Readers Choice Top Author 2019

Over twenty years ago, the Ninth Circuit decided the case of Dr. Seuss Enterprises., LP v. Penguin Books USA, Inc.  That case involved a copyright infringement lawsuit brought by Dr. Seuss over a book entitled The Cat NOT in the Hat! A Parody by Dr. Juice.  This book was about the O.J. Simpson trial presented in Seuss style rhyming verse and animation. The work begins:

A happy town

Inside L.A.

Where rich folks play

The day away.

But under the moon

The 12th of June.

Two victims flail

Assault!   Assail! 

Somebody will go to jail! Who will it be?

Oh my!  Oh me!

The book also presents a view of the OJ Simpson criminal murder trial from OJ’s perspective: “A man this famous/Never hires/Lawyers like/Jacoby Meyers/When you’re accused of a killing scheme/You need to build a real Dream Team.” The book’s illustrations included Simpson depicted 13 times in the distinctively scrunched and shabby stovepipe hat worn by the Cat in the Hat.  The defendants claimed that their use was non-infringing fair use; the court did not agree.

Over twenty years later (and just this month), the Ninth Circuit decided the case of Dr. Seuss Enterprises v. Comicmix, LLC et al., which involved a copyright infringement lawsuit over a Star Trek and Dr. Seuss mashup entitled Oh, The Places You’ll Boldly Go.  This work intermixes Star Trek characters like Captain Kirk, Spock and the Starship Enterprise in the Seuss world; for example, the cover features Kirk standing on a small moon or asteroid above the Enterprise  evoking the rainbow ringed disc and tower or tube pictured on the original work’s cover, The defendants admitted that they “painstakingly attempted” to make their illustrations “nearly identical” in certain respects to illustrations in the Dr. Seuss book, Oh, The Places You’ll Go, and went to great lengths to mimic the Seuss writing style.  The defendants claimed that their use was non-infringing fair use; the court agreed.  As the Grinch said, “how could it be so?”

In Cat NOT in the Hat, the defendant’s case relied mostly on fair use; primarily that the work was a parody.  The Ninth Circuit, in determining the first fair use factor – the purpose and character of the use – found the book was not a parody.  The court noted that while the book “does broadly mimic Dr. Seuss’ characteristic style, it does not hold his style up to ridicule” and that “[t]he stanzas have no critical bearing on the substance or style of The Cat in the Hat.”  The court essentially closed the door on the defendant’s case when it noted that there is “no effort to create a transformative work with “new expression or meaning.”

In Oh, The Places You’ll Boldly Go, the defendants also relied on the fair use defense and claimed that their work was a parody. While the Ninth Circuit, similar to Cat NOT in the Hat found the work not to be a parody, the court went on to determine that it was “highly transformative.”

It’s challenging to reconcile the treatment of the first fair use factor in the two cases, as the Ninth Circuit in Cat NOT in the Hat did not go into an analysis of the transformative nature of the work separate and apart from the inquiry into whether it was a parody.  In the Boldly Go case the court went to great lengths to explain how and why the work is transformative.  The court noted that while the defendants borrowed (liberally at times) from the Seuss work, the “elements borrowed were always adapted or transformed” by the inclusion of Star Trek (or Trek like) characters; the defendants’ additional material reframed the original material from a unique Star Trek viewpoint.

In considering the third factor[1], whether the amount and substantiality of the portion used in relation to the copyrighted work as a whole are reasonable in relation to the purpose of copying, the court in Cat took great issue with the defendant’s frequent use of the Cat in the Hat image and rejected the philosophical parallels the defendants attempted to draw between the two works, calling it a completely unconvincing post-hoc characterization.

However, in Boldly Go the court found that the defendants took no more from the original work than was necessary in order to create a mash-up of Go and Star Trek.  The court went to great lengths to examine the elements of the Seuss work entitled to copyright protection and measure the extent of the defendants’ copying of those elements.  For example, the court noted that Seuss “may claim copyright protection in the unique, rainbow-colored rings and tower on the cover of Go!  Plaintiff, however, cannot claim copyright over any disc-shaped item tilted at a particular angle.”  Even though Boldly Go was found not to be a parody, the court found that it did not “copy more than is necessary to accomplish its transformative purpose.”

Like Cat, Boldly Go liberally copied certain aspects of Go, however, the court specifically noted that the defendants did not copy verbatim text or replicate entire images.  To the author’s understanding, neither did Cat NOT in the Hat. The only significant difference that may explain the disparate treatment of this factor is that Cat NOT made liberal use of the Cat figure while Boldly Go apparently made no use of any major Seuss character.

The last fair use factor examines the effect (e.g., market harm) the infringing work may have on the value of the copyrighted work.  The key purpose is to determine to what degree the infringing work is a substitute for the original work.  Transformativeness and this factor are closely related; if a new work is transformative it’s not a substitute for the original work. In Cat NOT in the Hat the court said that because the work was not transformative, “market substitution is at least more certain, and market harm may be more readily inferred.”

In Boldly Go the court noted that Go is an extremely popular book for graduates and Seuss or its licensees have published many derivatives of Go.  The plaintiff claimed the work in question would harm its licensing opportunities.  The court found that Boldly Go is not a substitute for the original work as a children’s book; its impact on the market for graduation gifts or derivatives is a closer question. Because the court found Boldly Go to be transformative, the plaintiff was required to introduce evidence showing harm and such showing must be by a preponderance of the evidence.  The court found that the plaintiff failed to meet this burden.  Because the plaintiff introduced no evidence tending to show that it would lose licensing opportunities or revenues as a result of publication of Boldly Go or similar works, the potential harm to plaintiff’s market remains hypothetical.  As such, the court concluded that this factor favors neither party.

In Cat Not in the Hat the court found that the weight of the fair use factors favored a finding against fair use while Bold Go resulted in the opposite.  While these cases may seem tough to reconcile, there are distinct factual differences that may have caused the same court to find one way or another.  Also, followers of fair use cases appreciate that fair use is by no means static; it’s more like an active pendulum.

[1] In both matters, the second factor – the nature of the copyrighted work – favored the plaintiff.  This is usually the case with dealing with creative works.