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.

The United States Supreme Court granted a writ of certiorari in Iancu v. NantKwest to determine whether a patent applicant, win or lose, must pay the salaries of the United States Patent and Trademark Office’s (“USPTO”) in-house attorneys in district court actions challenging the rejection of patent claims by USPTO patent examiners.

When a patent applicant files for a patent, the USPTO assigns an examiner to review the application and determine whether the claims are patentable and a patent should issue.  If the patent examiner rejects claims in a patent application, the applicant can appeal that decision to the USPTO’s Patent Trial and Appeal Board (“PTAB”).  If that appeal is not successful, the applicant has two options for challenging the rejection.  The applicant can either 1) appeal the rejection directly to the Court of Appeals for the Federal Circuit or 2) file a civil action in the District Court for the Eastern District of Virginia.  35 U.S.C. §145.  Unlike in an appeal to the Federal Circuit, if the applicant brings an action in the district court, “[a]ll the expenses of the proceedings shall be paid by the applicant” regardless of the outcome of the litigation.  Id. 

There are pros and cons to these two options for challenging an examiner’s decision.  The Federal Circuit typically offers faster resolution, but it relies only on the record that was before the USPTO and does not review the matter de novo.  In contrast, filing a civil action in district court is slower, litigation expenses may be higher, and the patent applicant is required to pay the USPTO’s expenses regardless of whether the applicant wins or loses.  The district court, however, offers the applicant the option to present new evidence that was not presented to the USPTO, and the court must review that new evidence de novo.

While the statutory language requiring an applicant to pay all expenses in district court actions has long been in effect, the USPTO had not sought to recover attorneys’ fees in the past.  The USPTO, however, argues that two things changed in 2013 that led it to seek attorneys’ fees.  First, “in the America Invents Act, Congress directed the agency to set its fees so as ‘to recover the aggregate estimated costs to the [USPTO] for processing, activities, services, and materials relating to patents *** and trademarks.’”  Second, proceedings under Section 145 “have grown increasingly expensive and the single largest expense to the USPTO is often the time that agency employees must devote to those matters.’”

Therefore, for the first time in Shammus, the USPTO sought attorneys’ fees as part of its expenses under Section 145’s trademark provision.  Allowing recoupment of attorneys’ fees, the Court of Appeals for the Fourth Circuit explained that “the imposition of all expenses on a plaintiff in an ex parte proceedings, regardless of whether he wins or loses, does not constitute fee-shifting that implicates the American Rule.”  Shammus v. Focarino, 784 F.3d 219 (4th Cir. 2015).  The “American Rule” assumes each party pays its own attorneys’ fees absent explicit statutory authority to the contrary.

In Iancu, the USPTO has sought attorneys’ fees under Section 145’s patent provision.  The question raised in Iancu is whether the “expenses” that the applicant must pay in a district court proceeding challenging an examiner’s rejection of patent claims include the salaries for attorneys’ employed by the USPTO who work on the case.  In Iancu, the USPTO sought to recoup over $78,000 in attorney and paralegal salaries and over $33,000 in expert witness expenses.  The district court allowed reimbursement for the expert witness expenses but not the salaries.  The district court distinguished between the two types of expenses in finding that in light of the presumption under the “American Rule,” Section 145 was not sufficiently “specific and explicit” to cover attorneys’ fees or salaries.  The Federal Circuit, in a divided decision, reversed finding that “expenses” include “attorneys’ fees.”  Acting sua sponte, the Federal Circuit en banc reheard the case and ruled 7-4 that Section 145 does not cover attorneys’ fees because the statutory language “all the expenses” is not sufficiently “specific and explicit” to overcome that presumption of the “American Rule.”

In its petition for certiorari, the USPTO points to the Shammus ruling regarding trademark actions in support of its argument that the “American Rule” only applies in fee-shifting scenarios where a prevailing party is seeking to recoup expenses rather in cases such as this where the applicant must always pay the expenses.  However, the Federal Circuit en banc stated “Shammas’s holding cannot be squared with the Supreme Court’s line of non-prevailing party precedent applying the American Rule.”  The Federal Circuit “noted that a statute awarding attorneys’ fees to a losing party would represent ‘a particularly unusual deviation from the American Rule” because “[m]ost fee-shifting provisions permit a court to award attorney’s fees only to a prevailing party, a substantially prevailing party, or a successful litigant.’”

The USPTO also makes policy-based arguments for the reimbursement of attorneys’ salaries.  It argues that applicants have an alternative appellate process where they do not have to pay the USPTO’s expenses, a substantial amount of attorneys’ time is devoted to Section 145 district court proceedings given the additional discovery and new evidence presented, and it is unfair to make other patent applicants effectively underwrite the cost of Section 145 proceedings.

In its opposition to the petition for certiorari, NantKwest pointed out that “expenses” in Section 145 is at best ambiguous.  The fact that “expenses” could be construed to encompass attorneys’ fees or salaries is not sufficient to “specifically and explicitly” authorize attorneys’ fees and overcome the presumption of the “American Rule” that each party pays its own attorneys’ fees absent explicit statutory language to the contrary.  The USPTO, however, argues that even if the American Rule applies, “[a]ll the expenses of the proceedings” “is sufficiently specific and explicit to overcome the presumption … and authorize reimbursement of the USPTO’s” attorneys’ salaries.

The Supreme Court will decide this issue in the upcoming months, so stay tuned.