January 2016

WHAT YOU NEED TO KNOW ABOUT THE AMENDED DEFEND TRADE SECRETS ACT

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Guest post by James Pooley.  Pooley is the former Deputy Director General of WIPO. He recently testified at the Senate Judiciary Committee in favor of the Defend Trade Secrets Act. See his earlier Patently-O guest posts . He wishes to thank Prof. Peter Menell for contributing to this post.

Last Thursday the Senate Judiciary Committee favorably voted out the Defend Trade Secrets Act (“DTSA”), which would amend the Economic Espionage Act (“EEA”) to give trade secret plaintiffs the option of filing civil claims for misappropriation directly in federal court. The vote reflected broad bipartisan support (there are now 27 cosponsors in the Senate) and followed a substantive hearing on December 2 at which I had the privilege to testify. Since that time a number of senators engaged in discussions about how to improve the legislation. The result was a series of amendments, all of which have been adopted. Because the bill is likely to proceed quickly at this point, it would be useful to describe what has changed and what those changes could mean for practitioners and companies.

The notable amendments generally fall into four categories: (1) harmonizing with existing standards under the Uniform Trade Secrets Act (“UTSA”); (2) tightening up the process for preventive seizure of secrets; (3) ensuring that injunctions do not unreasonably restrain employee mobility; and (4) providing an exception for whistleblowers who disclose confidential information in order to report a crime to the authorities. The first three of these are laid out in a “Substitute” for S.1890, and the fourth is described in a separate amendment proposed by Senators Patrick Leahy and Chuck Grassley.

HARMONIZING WITH THE UTSA

Bringing the DTSA in closer alignment with familiar provisions of the UTSA, the amendments have slightly changed the definition of a trade secret. The EEA had previously required that qualifying information not be known or readily ascertainable to “the public,” while the UTSA had used the phrase “persons who can obtain economic value from its disclosure or use.” While it was never clear whether this difference would actually matter when applied in litigation, the UTSA formulation has now been adopted, so that the two laws are congruent. (Some still point to the different list of examples of protectable information in the UTSA and EEA definitions, but this has never been shown to make any difference in the broad meaning of the common basic term “information.”)

The amendments have also changed the term of the statute of limitations from five years to three. Although a number of states have designated longer periods (from four to six years), this brings the DTSA into line with the UTSA as it was originally proposed. In the same vein, the enhanced damages provision, which had allowed a punitive assessment up to three times the compensatory award, has been adjusted to match the provisions of the UTSA at twice the amount of compensatory damages.

SEIZURE PROVISIONS

The ex parte seizure provisions have been substantially tightened, providing more assurance that this remedy will not be abused. First, the bill now expressly refers to seizure as available only in “extraordinary circumstances.” Second, an ambiguity identified by Senator Whitehouse at the December hearing has been resolved by clarifying that the target of the seizure must be in “actual” possession of the trade secret and property to be seized. Third, access to the seized material is more limited: only federal law enforcement can perform the seizure, with assistance as necessary from state authorities and an independent technical expert, but the applicant is barred. And following the seizure, the court may have the material sorted by a special master who, like the technical expert, must be under confidentiality restrictions. Fourth, in issuing its order the court must direct when the seizure may be carried out, and whether force may be used to access locked areas. Finally, in a new section the bill requires the Federal Judicial Center to develop “best practices” for seizure and handling of electronically stored information.

MOVING ON FROM “INEVITABLE DISCLOSURE”

One of the most interesting and potentially impactful provisions of the amendments concerns the preservation of employee mobility. Recognizing the critical importance of preventive relief to a right that can be so easily destroyed, the UTSA has always permitted injunctions against “threatened misappropriation,” and the same language is used in the DTSA. But because the DTSA would establish a national standard, some expressed fears that the “inevitable disclosure doctrine,” which has been expressly rejected in some states, might be used by federal judges to block an employee from taking a new job. The draft bill had tried to address this concern with a proviso that no injunction could “prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation,” but this did not quiet the controversy.

To understand the nature of the dispute we need to wind back the clock to 1995, when the Seventh Circuit issued its decision in Pepsico v. Redmond, 54 F.3d 1262 (7th Cir. 1995), affirming a five-month injunction against a former marketing executive who had lied about his plans to take an identical position with another company that was about to launch a directly competitive product. Although the court had emphasized the executive’s bad behavior, it also summarized that “defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Commentators promptly wrenched this phrase from its context and warned that Pepsico could be used to justify enjoining someone from taking a job just because of what he or she knew. This is how the so-called “inevitable disclosure doctrine” was born.

Having (mis)construed Pepsico this way, it was easy for some to make it a target, raising the alarm that “inevitable disclosure” was the equivalent of a post-hoc judicially-imposed non-compete agreement. Perhaps unsurprisingly, the backlash was particularly strong in California, where employees are protected by a robust public policy against restrictive covenants. In Whyte v. Schlage Lock, 101 Cal. App. 4th (2002), an intermediate appellate court issued a blistering condemnation of the doctrine and flatly declared it unacceptable under California law. It did this in response to the plaintiff’s argument that the doctrine should be available as an “alternative” to proving “threatened misappropriation.” Just what kind of evidence might be enough to establish a threat under the UTSA was not addressed. However, that question was answered several years later in another appellate decision, Central Valley General Hospital v. Smith, 162 Cal. App. 4th 501 (2008). The court said that evidence of bad behavior, like a prior misappropriation, an intention to misappropriate, or a refusal to return confidential material, would be enough to supply the inference.

In the meantime, however, the ideological battle lines had been drawn, and the forces mustering against inevitable disclosure, reinforced by many academic and popular articles, were determined to stamp it out if possible, or at least to protect their own jurisdiction from infection. The fervor of the debate apparently distracted everyone from critically examining what “inevitable disclosure” meant, or how it was actually being applied in places that didn’t have a reflexive opposition to it. It turns out that the doctrine was almost never used as the opponents assumed, that is where the only threat indicator was how much the employee knew. In fact, in those cases judges typically explained their denials by reminding the plaintiff that if all this information had been so critically important they could have demanded that the employee sign a non-compete agreement.

Following last December’s hearing, and in the wake of continuing concerns over the relevant DTSA language, I reached out to my friend Mark Lemley, professor at Stanford Law School. Mark and I had worked together before on issues relating to California’s “high velocity” labor market, and after some discussion about what appeared to be this false conflict over the inevitable disclosure doctrine, we suggested to Senate staff that the issue could better be reframed around the kind and quality of evidence that should be required – under the UTSA or the DTSA – to prove “threatened misappropriation,” and that the inquiry should focus on the employee’s behavior, not merely on how much they knew.

Ultimately, Senator Dianne Feinstein proposed the relevant portion of the DTSA amendments, which now allows an order against threatened misappropriation, provided that it not “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” (In a belt-and-suspenders approach, the DTSA also includes a directly related amendment proposed by Senator John Cornyn that the order may not “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”)

The new language on threatened misappropriation has at least two very positive effects. First, it makes express the apparent consensus from the courts that “threatened” misappropriation may not be established merely by the importance of the information that someone knows. This makes sense not only as a matter of public policy but also of evidence law. Second, it relieves us from the energy-draining debate over “inevitable disclosure,” which was pretty much a straw man that people loved to punch. Courts will not have to consider whether a jurisdiction accepts or rejects this abstract “doctrine,” but instead will ask: what is the actual evidence from which we should conclude that this person (or their new employer) can’t be trusted to honor the integrity of the plaintiff’s trade secrets? Outcomes in particular cases should not be substantially different.

WHISTLEBLOWER PROTECTION

A second major amendment was offered separately by Senators Leahy and Grassley, addressing a new, and in my opinion long neglected, question: how do we assure that employees and contractors who come upon evidence of illegal activity, but who are constrained by nondisclosure agreements from communicating those facts, can safely speak to their lawyers and to law enforcement officials? One might think that this question would already have been reliably answered by now, but it hasn’t been. In a wide-ranging and thoughtful on the subject, Tailoring a Public Policy Exception to Trade Secret Protection, Professor Peter Menell of the UC Berkeley School of Law explores not only the sparse, murky, and sometimes contradictory legal authority, but also the psychology of whistleblowing and the importance of a clear “safe harbor” for those who are thinking of reporting wrongdoing. As he notes, “[t]he same routine non-disclosure agreements that are essential to safeguarding trade secrets can be and are used to chill those in the best position to reveal illegal activity.”  As a practical matter, employees and contractors face a stark dilemma, where the upside is a clear conscience (and possibly a reward for uncovering fraud) but the downside can involve painful and relentless retaliation as well as personal, financial, legal, and professional risk. Insulating the whistleblower from costly trade secret exposure serves larger societal interests in law enforcement, tax compliance, and surfacing and deterring securities fraud and fraud against the government..

Yet because of the difficulty of enforcing trade secrets once they leak, companies risk potentially significant losses if employees or contractors mistakenly disclose legitimate trade secrets—i.e., those that do not reveal illegal conduct. Peter’s article provided a balanced and effective solution to this dilemma that protects whistleblowers without jeopardizing disclosure of legitimate trade secrets. The proposed safe harbor insulates whistleblowers and their counsel from trade secret liability for disclosing trade secret information in confidence to government officials or as part of a lawsuit alleging retaliation by an employer provided that the information is filed under seal. (The federal Trade Secrets Act, 18 U.S.C. § 1905, generally prohibits governmental employees from disclosing trade secrets.) The proposed statutory exception to trade secret liability provides clear assurance to potential whistleblowers that they do not violate their NDAs merely by consulting legal counsel regarding reporting allegedly illegal conduct to a responsible government official through a confidential channel. In addition, this safe harbor insulates lawyers advising potential whistleblowers about their options and serving as conduits for presenting evidence of allegedly illegal conduct to the government. The efficacy of the safe harbor is enhanced by requiring that NDAs prominently include notice of the law reporting safe harbor to ensure that those with knowledge of illegal conduct are aware of this important public policy limitation on NDAs and exercise due care with trade secrets in reporting such activity.

After Peter’s article appeared just as the DTSA was gaining momentum in the fall, the Senate staff reached out to him to help craft appropriate language. The Leahy/Grassley amendment provides immunity under federal or state law against any claim for violation of an individual’s nondisclosure obligations for disclosure, made in confidence, to (a) an attorney or government official, for the purpose of reporting or investigating a violation of law, or (b) a filing made under seal in a lawsuit “or other proceeding.” In order to ensure that employees (a term that also includes contractors) know about their rights, employers are required to give an appropriate notice in the nondisclosure agreement (as is often done now with state inventor statutes), although this can be a reference to the company’s separate policy document. A failure to comply with the notice provision would block any award of attorneys’ fees or enhanced damages against an employee under the DTSA. Significantly – and this point was emphasized by Senator Feinstein at the hearing on January 28 – the whistleblower protection would not extend to any otherwise improper acts by the employee, such as hacking information in violation of the Computer Fraud and Abuse Act.

CONCLUSION

The DTSA in its current form is a strong bill, meeting its original objective of giving plaintiffs access to federal courts, which are better equipped to handle cases of interstate or international misappropriation of trade secrets. In my opinion, all reasonable objections have been adequately addressed, and there are sufficient protections built in against abuse. Moreover, passage of this bill would substantially improve the environment for both plaintiffs and defendants, by making trade secret litigation more predictable, establishing a national standard for issues like “threatened misappropriation,” and striking the right balance of interests to promote responsible efforts by whistleblowers to report possible violations of law.

REPORT AND ANALYSIS OF RECENT AMENDMENTS TO S. 1890 (The Defend Trade Secrets Act 2016)

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By Professor Sharon K. Sandeen, Mitchell Hamline School of Law  

The Defend Trade Secrets Act (S. 1890) passed out of the U.S. Senate Committee on the Judiciary today, but not before it was amended to address a number of concerns that were voiced by opponents over the past two years. The following is my quick analysis of the changes.  Note that there were actually two sets of amendments to the legislation. The so-called manager’s amendment (labeled “S. 1890 Substitute Amendment”) and amendments offered by Senators Leahy and Grassley (labeled “Leahy-Grassley1”). The following page and line references are to the Substitute Amendment. The Leahy-Grassley amendments are discussed thereafter.  [S.1890 Substitute Amendment][Leahy-Grassley1].

1. S. 1890 Substitute Amendment

Page 1:

The legislation is now to be known as the “Defend Trade Secrets Act of 2016” instead of “2015.”

Page 2, line 2:

“Misappropriated” added and language “aggrieved by misappropriation” deleted

Sandeen Comment: This change was apparently made in response to expressed concerns that “aggrieved” might be introducing a new concept of wrongdoing into trade secret law. Since “misappropriation” is a defined term in the DTSA (copied from the UTSA), it is better to stick with that language.

Page 2, lines 11-12:

With respect to the ex parte civil seizure remedy, the language “but only in extraordinary circumstances” was added.

Sandeen Comment: I am not sure what this language adds other than to emphasize the fact that this remedy should rarely be granted. But that begs the question: Why is the remedy needed at all if it will rarely or ever be granted? No one has ever explained to me why egregious cases that might justify such a remedy would not be championed by the U.S. Department of Justice in a criminal case. But there is a clue in later amendments to the EEA criminal provisions that give trade secret owners standing to assert secrecy concerns in such cases. (See report on new Section 3 below).

Page 2, lines 24-25:

The language “another form of equitable relief” was added to limit the circumstances under which an ex parte seizure order could be granted.

Sandeen Comment: As I understand the limitations built into the civil seizure provision, such an order is not to be granted unless other available equitable relief is inadequate. What seems to be lost in the discussion of all forms of equitable relief is that there are legal remedies available, including potential exemplary damages. Typically, equitable relief is not available when such is the case. In this regard, I wonder if “another form of equitable relief” would include a royalty injunction.

Page 4, line 5 et seq:

A new section (V) has been created (and subsequent subsections re-lettered accordingly) to highlight that “the person against whom seizure would be ordered” must have actual possession of both the trade secret and the property to be seized.

Sandeen Comment: While seemingly limiting the scope of the civil seizure remedy, this addition confirms what the opponents of DTSA were afraid of: that the civil seizure remedy can be used to seize property in addition to the actual trade secrets. While the person against whom seizure would be ordered must be shown to have either misappropriated a trade secret or conspired to misappropriate a trade secret, this language is actually much broader than it may seem on the surface. This is because the definition of misappropriation under the DTSA (and the UTSA) can apply to third-parties who were not directly involved in the initial misappropriation, provided they have the requisite (but obviously later acquired) knowledge. For instance, new employers.

Page 5, line 13:

Deletes the language “that are unrelated to the trade secret that has allegedly been misappropriated” in describing the elements of any civil seizure order.

Sandeen Comment: This was apparently intended to limit the scope of a civil seizure order, which is a good thing if it works.

Page 5, line 16 – page 6, line 11: 

Uses “prohibiting” instead of “restricting” and makes other changes to the provision concerning the required content of a civil seizure order, the most significant change being the addition of a new sub section (iv) which requires the court to “provide guidance to law enforcement officials” concerning how they are to execute the order.

Sandeen Comment: This language was undoubtedly added to address concerns that Senator Sheldon Whitehouse raised during the hearing on DTSA that was held before the U.S. Senate Committee on the Judiciary in December of 2015. His principal concern related to the use of force in the event that the person against whom seizure would be ordered was uncooperative.  

Page 7, line 13 – page 8, line 22:

The “Materials in Custody” provision was re-labeled and expanded, particularly with respect to the newly labeled sub-section “Storage Medium” and new provisions labeled “Protection of Confidentiality” and “Appointment of a Special Master.”

Sandeen Comment: The added language was undoubtedly added in an attempt to address concerns about the scope of any civil seizure order (including the very real possibility that property not relevant to the trade secret case might be seized), the handling of seized information, and the practical reality that federal court staff is ill equipped to manage such materials. Nothing in the legislation indicates who will pay for the services of a Special Master.

Page 9, line 2-15:

Deleted the language that used to allow state and local officials to execute a civil seizure order and instead specifies that a civil seizure order must be executed by federal law enforcement personnel.  State and local law enforcement personnel can be involved, but they cannot be involved in the actual seizure of property. Further, the court may allow for the use of a technical expert to assist federal law enforcement officials in executing the civil seizure order, again without specifying who will pay for the technical expert.

Sandeen Comment: These amendments address some of the concerns that have been expressed about how a civil seizure order will be executed and how it can be done without including the legitimate business information of the “person against whom civil seizure is ordered.” However, the more that efforts are made to address the concerns of critics, the more the risks of such a remedy are revealed. If this remedy will be used very infrequently as its proponents argue, Congress should ask if the marginal benefits of this remedy are worth its tremendous costs, particularly given the fact that: (1) criminal prosecution and seizure are possible in egregious cases; and (2) plaintiffs in trade secret cases have very robust legal remedies in the event of the loss of trade secrecy.

Page 11, line 6 et seq:   

The standing to file a motion for encryption has been broadened to include both parties to the litigation and “a person who claims an interest in the subject matter seized.”

Sandeen Comment: This is a positive development, but obviously it acknowledges that non-parties may be affected by a civil seizure order and be forced to hire an attorney to protect their interests.

Page 11, line 23 – page 12, line 8: 

The provisions concerning the effect of injunctions on employment were re-worked, re-lettered and expanded. First, the original language was amended so that any injunction must “be based upon evidence of threatened misappropriation and not merely on the information a person knows.” Second,   the legislation now includes language which states that an injunction cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”

Sandeen Comment: This is a very positive development that makes it clear that State law governing restrictive covenants, including non-compete agreements, will continue to apply as limits on the scope of injunctive relief. More specifically, it rejects the worst aspects of the inevitable disclosure doctrine which many states (most notably California) have found to be inconsistent with their laws against restrictive covenants, particularly those that restrict employee mobility. Issues of choice of law remain, of course. 

Page 13, line 9: 

The measure of potential exemplary damages has been lowered to 2 times instead of 3 times.

Sandeen Comment: This is a positive development, particularly for the proponents of the DTSA who claim that its primary purpose is greater uniformity in trade secret law. The new language is consistent with the UTSA. However, it appears that this change may have been part of a compromise since (as discussed below), the criminal penalties for a violation of the EEA have been increased.

Page 13, line 23: 

The statute of limitations has been lowered to 3 years from 5 years.

Sandeen Comment: This change also makes the statute of limitations consistent with the language of the UTSA (although some UTSA states have not adopted the statute of limitations specified in the UTSA). This is a positive development because businesses can now be more certain when threats of trade secret litigation will end. Since the statute of limitation follows the discovery rule, plaintiffs will have plenty of time to bring a lawsuit once the facts giving rise to such claims are discovered.

Page 14, line 8:

The definitions provisions of the DTSA must be read alongside the existing definition provisions of the EEA, which is where you will find the definition of a trade secret. A change from earlier versions of the legislation is that the word “public” in 18 U.S.C. §1839 (3)(B)  (the definition of a trade secret) will be substituted with “another person who can obtain economic value from the disclosure or use of the information.”

Sandeen Comment: This is another positive development that makes the definition of a trade secret under the EEA (as amended) more consistent with the language of the UTSA. Without this amendment, the EEA might be interpreted to include information that is in the public domain under state law. Not changed in the EEA to be consistent with the UTSA is the first part of the definition of a trade secret which, under the EEA, includes a litany of types of information that might qualify for trade secret misappropriation. However, this greater specificity always struck me as necessary since the EEA was initially, and will remain in part, a criminal statute.

Page 17, line 21 – Page 19, line 2:   

A new Section 3 was added titled “Trade Secret Theft Enforcement” and old Section 3 was re-labeled as Section 4. This section increases the penalties for a violation of 18 U.S.C. §1832 from $5,000,000 to the greater of $5,000,000 or 3 times the value of the stolen trade secrets to the organization, including the costs of reproducing the trade secrets. Second, it adds a new provision titled “Rights of Trade Secret Owners” that essentially allows trade secret owners to be heard in criminal court concerning the need to protect their trade secrets. Lastly, it amends 18 U.S.C. §1961 (the RICO statute) to add a violation of the EEA as a predicate act.

Sandeen Comment: At first blush, these changes seem to more directly address the concerns that motivated the proposed legislation and should have been tried first before risking the disruption of U.S. trade secret law by creating a federal civil cause of action for trade secret misappropriation. What they reveal is the concern that trade secret owners have about the effectiveness of federal criminal prosecution to stop (or punish) the most egregious cases of trade secret misappropriation. They also reflect the risks to trade secrets posed by the public nature of criminal prosecutions. Robust criminal laws are already on the books to punish those who would engage in the most egregious forms of trade secret misappropriation, but trade secret owners might be hesitant to report such crimes out of fear that their trade secrets might be lost in the process. Allowing trade secret owners to express their confidentiality concerns in a criminal court seems like a good idea. More study of the implications of the RICO provision is needed, particularly with respect to the potential for the over assertion of criminal prosecutions which was a major concern of business interests when the EEA was first adopted.

Page 22, line 23 et seq.:

The re-numbered “Sense of Congress” provision (now Section 5) added point (4) concerning the civil seizure order and Congress’ sense that the need for such a remedy should be balanced  against the risk of interrupting the business of third parties and the legitimate interests of the party accused of wrongdoing.

Sandeen Comment: While this is helpful language, it is interesting that this language is included in the “Sense of Congress” provision and not in the text of the civil seizure provision itself. While Congress is at it, I would urge it to add point (5) to the “Sense of Congress” and state that the DTSA should be interpreted and applied in a manner that is consistent with the commentary to the UTSA.

Page 23, Line 4 et seq:  

New Section 6 was added titled “Best Practices” to require the Federal Judicial Center “using existing resources” to, within two years, recommend best practices related to civil seizure orders.

Sandeen Comment: Again, this indicates that concerns about the abuse of civil seizure orders remain.

2. Leahy-Grassley Amendments

These amendments would add a section to the DTSA, in a place to be determined, titled “Immunity from Liability for Confidential Disclosure of a Trade Secret or in a Court Filing.” This new section is designed to protect whistleblowers from liability for the disclosure of trade secrets to the government and in the context of retaliation lawsuits, provided that steps are taken by the whistleblower to keep such information confidential. It also would require employers to give notice of such immunity to employees, thereby requiring an exception to confidentiality provisions.

Sandeen Comment: This is a very positive development for those who are concerned that the assertion of trade secret rights can be used to prevent the timely disclosure of information that is needed by law enforcement authorities. However, it only applies where there is an alleged violation of law and not, more broadly, in situations where threats to public health exist, for instance.  

= = = = =

[Prior Patently-O Posts on the DTSA]

Patentlyo Bits and Bytes by Anthony McCain

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Get a Job doing Patent Law

Section 285 Does Not Support Deterrence Based Fee Enhancement; Next Stop Rule 11 Sanctions

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This is the second post on the attorney-fee-case of Lumen View v. FindTheBest.com.  The original post focused on the Federal Circuit’s holding that (1) the exceptional case finding was appropriate but (2) it was improper to double the awarded attorney fees for the purpose of added deterrence.  In making its determination, the Federal Circuit looked to the Patent Act that authorizes only “reasonable attorney fees” to the prevailing party in an exceptional case.

In a one-sentence statement at the end of its vacatur, the Federal Circuit suggests that the district court might instead consider sanctions under Rule 11 of the Federal Rules of Civil Procedure. “Whether the court wishes to utilize Rule 11 or any other statutory framework is of course up to the district court.”

In Octane Fitness, the Supreme Court noted the partial overlap between Section 285 fees and R. 11 sanctions.  Section 285 does not particularly require sanctionable conduct but does require that the recipient be the ‘prevailing party.’

Importantly for the discussion here, Rule 11 particularly authorizes sanctions designed “to deter repetition of the [sanctioned] conduct or comparable conduct by others similarly situated.”  Here, the district court (supported by the Federal Circuit) has already found the complaint at least recklessly baseless and that may be enough to legally support a deterrence-based sanction.  The court’s next move may be to issue an order to show-cause under R. 11(c)(3).

 

 

Prevailing Defendant’s Exceptional Case Restitution Limited to “Reasonable Attorney Fees”

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By Dennis Crouch

In Lumen View v. FindTheBest.com, the Federal Circuit has affirmed the the district court’s “exceptional case” finding under 35 U.S.C. §285, but has vacated the award as unjustifiably large. In particular, the district court erred by doubling the fee award as a mechanism designed to “deter baseless litigation.”

In the underlying lawsuit, Lumen sued FTB for infringing its U.S. Patent 8,069,073 covering a computer method for matching parties to a potential financial transaction based upon “multilateral analyses” of “preference data.”   On the pleadings, S.D.N.Y. Senior Judge Cote dismissed the case  writing that “[t]here is no inventive idea here. . . . Nothing in the ‘073 patent evinces an inventive idea beyond the idea of the patent holder to be the first to patent the computerization of a fundamental process that has occurred all through human history.”  In the fee award judgment, the district court noted that, the accused infringers clearly did not infringe even under the patentee’s proposed claim construction.  According to the district court “the most basic” investigation prior to filing the lawsuit would have made the non-infringement clear – and, in fact, the non infringement had been particularly explained in a pre-filing letter from the defendant.

In finding the case “exceptional”, the district court primarily focused on the baselessness of the patentee’s legal claim, but also on its conclusion that the patente was seeking a “nuisance settlement” via a “predatory strategy.”

On appeal, the Federal Circuit affirmed the exceptional case finding (no abuse of discretion” — noting that “[t]th allegations of infringement were ill-supported, particularly in light of the parties’ communications.”

The double award: Once a case is deemed “exceptional,” section 285 permits a district court judge to award “reasonable attorney fees” to the prevailing party.  “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”  Here, the defendant showed $148,592 in reasonable fees and the district court doubled that figure ($297,184) based upon its determination that the patentee needed more deterrence.

On appeal, the Federal Circuit first agreed that the award calculation is within the discretion of the district court judge.  However, most courts follow the approach of multiplying hours worked (if reasonable) by a reasonable hourly fee — with that calculation as the “lodestar”, a court then makes adjustments to ensure the award is reasonable.

Here, the district court followed that approach and then doubled the results for punishment/deterrence.  The appellate panel found that deterrence is not an appropriate justification for increasing a fee award under Section 285.

Although deterrence may be a consideration when determining whether to award attorney fees, it is not an appropriate consideration in determining the amount of a reasonable attorney fee, which is principally based on the lodestar method. Unlike sanctions that are explicitly tied to an amount that suffices to deter repetition of conduct, see Fed. R. Civ. P. 11(c)(4), § 285 only specifies “reasonable attorney fees” once an exceptional case is found. And the lodestar method, yielding a presumptively reasonable attorney fee amount.

As noted above, the lodestar approach is a preferred methodology for fee calculation, but district courts are not limited to that approach.  On remand, the district court has the potential maintaining its same fee award – but it would need to construct a new explanation of how the doubling would be a reasonable fee.

The Federal Circuit did not award fees or costs to either party.

 

Federal Circuit: Board Must Explain its Decisions

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by Dennis Crouch

In the non-precedential Cutsforth v. MotivePower decision, the Federal Circuit has vacated a PTAB inter partes review (IPR) final decision — holding that “the Board did not adequately describe its reasoning for finding the claims obvious.”

The patent at issue is directed to a brush-assembly used to maintain an electric current with a rotating mechanism. US Patent No. 7,990,018. 

The Federal Circuit requires that the PTAB “articulate articulate its reasoning for making its decision.” See In re Sang-Su Lee, 277 F.3d 1338 (Fed. Cir. 2002).  Along these lines, the board must explain the factual bases for its findings and must go well beyond “conclusory statements.”  Most PTAB decisions are related to the question of obviousness and the Federal Circuit particularly requires the Board to “explain why a person of ordinary skill in the art would modify the prior art references to create the claimed invention.” See In re Kotzab, 217 F.3d 1365, 1369 (Fed. Cir. 2000) and In re Rouffet, 149 F.3d 1350 (Fed. Cir. 1998).

Here, the Board apparently recited the challenger’s (MotivePower’s) arguments and the ultimate conclusion of obviousness, but did not “formally” adopt the arguments as its own conclusions. See MotivePower, Inc. v. Cutsforth, Inc., IPR2013-00274.  On appeal, the Federal Circuit rejected this approach. Some key quotes:

The Board’s decision appears to assume this combination is obvious. It offers no explanation for why a person of ordinary skill in the art would adjust Bissett and Kartman to create the claimed mounting block of the ’018 patent. The Board only states that MotivePower argued it was obvious to do so. Merely reciting MotivePower’s argument does not satisfy the Board’s responsibility to explain its own reasoning. The decision must explain why a person of ordinary skill in the art would find it obvious. The Board gives no such explanation. . . .

For claim 5, which requires that the mounting block include a spring, the Board explains that the placement of the spring on the mounting block is simply a design choice. . . . This statement alone is not enough to explain why the Board found claim 5 obvious. Merely stating that a particular placement of an element is a design choice does not make it obvious. The Board must offer a reason for why a person of ordinary skill in the art would have made the specific design choice to locate the spring on the mounting block. Here, it does not.

On remand, I expect that the Board will simply rewrite its 33-page decision – better explaining its holdings – but we shall see. [PTAB Final Decision: final decision-31].

To be clear, although the PTAB is held to this high standard, patent examiners are not.  Rather, examiners are only required to provide notice of their rejection/objection rather than a full-bodied explanation.  Update: I just looked at the comment section and note that a number of folks raise the important point that my off-the-cuff statement an examiner’s notice burden is limited to the introductory rejection and establishing a prima facie case as the Federal Circuit explained in Packard.  Once a prima facie case is established, the patent applicant has the opportunity to rebut that case. And, once rebutted, the examiner’s burden is then raised actually prove the case if possible.

Patent Term Adjustment: Erroneous and later Withdrawn Restriction Requirement Still Counts as a Section 132 Notice

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By Dennis Crouch

Pfizer v. Lee (Fed. Cir. 2016) [PfizerLee Opinion]

In this case, the Federal Circuit has refused Wyeth’s (now Pfizer’s) plea for more patent-term-adjustment (PTA).[1]

The basic issue is involves the “A-Delay” category of patent term adjustment that provides for term adjustment when the PTO fails to issue its first office action within fourteen months from the application filing date.

Here, the patent examiner’s first qualifying action was a restriction requirement mailed in August 2005.  However, after a discussion with Wyeth’s attorneys, in February 2006 the examiner withdrew the restriction requirement and issued a corrected version.

The question then is whether the original restriction requirement qualifies to cut-off the A-Delay even though it was later withdrawn as insufficient.

The term adjustment statute indicates that A-Delay will stop accruing once the USPTO  “provide[s] at least one of the notifications under Section 132.”[2]  Section 132(a) in turn provides:

Whenever, on examination, any claim for a patent is rejected, or any objection or requirement made, the Director shall notify the applicant thereof, stating the reasons for such rejection, or objection or requirement, together with such information and references as may be useful in judging of the propriety of continuing the prosecution of his application.

In prior cases, the court has offered some guidance as to when Section 132 is met.  In particular, the court has held that the notice does not have to present a winning argument or overwhelming factual evidence.  Rather, the rule is simply that the notice must be sufficient to permit the applicant to recognize the grounds for rejection/objection.[3]  In Chester v. Miller, the Federal Circuit wrote that Section 132 simply requires that the applicant “at least be informed of the broad statutory basis for [the rejection of] his claims, so that he may determine what the issues are on which he can or should produce evidence.”

Coming back to the facts of this case: The failure of the original restriction requirement divided the 100+ claims into twenty one distinct groups, but the restriction requirement failed to expressly categorize of the six dependent.  On appeal, the Federal Circuit found, despite the examiner’s error, that the mailing was still sufficient to meet the notice requirement.

Here, the examiner’s detailed descriptions of the 21 distinct invention groups outlined in the examiner’s initial restriction requirement were clear, providing sufficient information to which the applicants could have responded. Indeed, the applicants never challenged the content of the invention groups defined by the examiner. And, significantly, the examiner’s defined invention groups remained identical between the two restriction requirements. Viewed as a whole, the restriction requirement provided adequate grounds on which the applicants could “recogniz[e] and seek[] to counter the grounds for rejection.” Chester. Therefore, because the examiner clearly defined to the applicants the invention groups available for election and further prosecution, the applicants were placed on sufficient notice of the reasons for the examiner’s restriction requirement.

As for the six claims whose classifications were omitted from the initial restriction requirement, Wyeth could have taken direction for their classification from the fact that their respective independent claims were each included in the initial restriction requirement. Here, the dependent claims would naturally have been classified in a subset of the invention groups to which the claims they depend from belong.[4]

The PTO’s position is somewhat strengthened by its own MPEP statements that a restriction requirement which fails to classify all of the claims still counts as providing a section 132 notice.

The majority opinion was written by Judge O’Malley and joined by Judge Dyk.  Judge Newman wrote in dissent — arguing that this was a case of clear error by the examiner and should not count as a proper notice.  If Judge Newman is correct, Wyeth would been within its rights to simply sit on its hands not respond until the USPTO issued its notice of abandonment.

= = = = =

Coming out of this case (and others), we know that even a very low quality mailing from a patent examiner will be counted sufficient notice and thus force a response on threat of abandonment.  Where a procedural error exists, the best practice action then is to quickly contact the examiner and identify the error.   Here, Wyeth waited until four days before the deadline to respond.

= = = = =

[1] The case involves U.S. Patent No. 8,153,768 that issued from U.S. Patent Application No. 10/428,894.

[2] 35 U.S.C. § 154(b).

[3] Chester v. Miller, 906 F.2d 1574 (Fed. Cir. 1990).

[4] In a footnote, the Federal Circuit suggests that failure to classify and independent claim could possibly fail the notice requirement of Section 132.

Inter Partes Review: An Unconstitutional Delegation of Judical Power

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Carl Cooper has now filed his constitutional challenge to the Inter Partes Review (IPR) system — arguing that the system is an unconstitutional delegation of judicial power to an administrative agency. [Petition: Cooper v. Lee]

Question presented:

Whether 35 U.S.C. §318(b) violates Article III of the United States Constitution, to the extent that it empowers an executive agency tribunal to assert judicial power canceling private property rights amongst private parties embroiled in a private federal dispute of a type known in the common law courts of 1789, rather than merely issue an advisory opinion as an adjunct to a trial court.

The brief here is well-written because it focuses on the tight issue of parallel court/proceedings and the history:

No previous court has ever approved delegating validity-determination authority over common-law-adjudicated property rights to a non-Article III decisionmaker.

And, the petition suggests a way-out via an advisory opinion from the PTAB:

[T]his Court may make the process constitutionally sound by doing what it has always done under these circumstances: make the outcome of inter partes review advisory and subject to de novo treatment in an Article III trial court. So corrected, inter partes review may still identify and appropriately target “junk patents,” though an Article III trial court will need to perform the final act of invalidation.

 

Cooper also suggests that the court link this case to Cuozzo:

This Court may thus hear the two cases together, the one raising smaller issues (Cuozzo) alongside the one raising larger issues (this case). That would secure a more complete vetting of administrative agency authority.

Obviously, a favorable decision here could render Cuozzo completely moot, and wouldn’t that be quite interesting.

 

Anonymous Loan Shopping — An Unpatentable Abstract Idea

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By Dennis Crouch

On summary judgment, Judge Guilford (C.D.Cal) found Mortgage Grader’s asserted patents[1] ineligible under 35 U.S.C. § 101.[2]  On appeal, the Federal Circuit has affirmed this substantive holding as well as the district court’s procedural decision to allow the defendant (First Choice) to re-add its Section 101 contention after first dropping it.[3]  The appellate decision here was authored by Chief Judge Stark (D.Del) who was sitting by designation.  Judges O’Malley and Taranto joined the unanimous opinion.

A patent is not permitted to effectively claim an abstract idea.  In Mayo/Alice, the Supreme Court outlined a two-step process for determining whether this exception applies to Section 101’s otherwise broad eligibility principles: (1) is the claim at issue directed to a patent-ineligible concept and (2) if so, does the claim include an “inventive concept … sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”[4]

Here, the district court found that the claims-at-issue were generally directed to “anonymous loan shopping” which is an unpatentable abstract idea.[5]  According to the court and apart from the computerization claim limits, the “series of steps covered by the asserted claims—borrower applies for a loan, a third party calculates the borrower’s credit grading, lenders provide loan pricing information to the third party based on the borrower’s credit grading, and only thereafter (at the election of the borrower) the borrower discloses its identity to a lender—could all be performed by humans without a computer.”  These human-mind-potentials cannot be claimed in the abstract.  In step two of Mayo/Alice, the court considered the computerization elements of the claims, but found only “generic computer components such as an ‘interface,’ ‘network,’ and ‘database.’ These generic computer components do not satisfy the inventive concept requirement.”

In the appeal, the patentee argued a factual dispute regarding the history of loan processing in an attempt to show that the process here was not “old.”  The appellate panel, however, found the testimony essentially irrelevant to the legal question of whether claim is directed to an abstract idea.

====

On the procedural point, the defendant had dropped its eligibility defense from its contentions. However, following the Supreme Court’s Alice decision added the contention back into place – but well after the court appointed deadline.  On appeal, the appellate panel confirmed that the district court did not abuse its discretion in allowing that procedural anomaly because of the significance of the decision:

In Alice, the Supreme Court held that “merely requiring generic computer implementation fails to transform [an] abstract idea into a patent-eligible invention.” 134 S. Ct. at 2352. We recognized the significance of Alice in buySAFE, Inc. v. Google, Inc., 765 F.3d 1350, 1354–55 (Fed. Cir. 2014), in which we stated that Alice “made clear that a claim directed to an abstract idea does not move into § 101 eligibility territory by merely requiring generic computer implementation” (internal quotation marks omitted). The impact of Alice is also illustrated by our decision in Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709 (Fed. Cir. 2014) (“Ultramercial III”). Ultramercial had sued WildTangent for infringement of U.S. Patent No. 7,346,545, a patent directed to allowing consumers to view copyrighted media products on the Internet at no cost in exchange for viewing an advertisement. See id. at 712. When the case was first before us, in 2011, we reversed the district court’s grant of WildTangent’s Rule 12(b)(6) motion to dismiss, holding that “as a practical application of the general concept of advertising as currency and an improvement to prior art technology, the claimed invention is not so manifestly abstract as to override the statutory language of § 101.” Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323, 1330 (Fed. Cir. 2011) (“Ultramercial I”) (internal quotation marks omitted). The Supreme Court granted WildTangent’s petition for certiorari, vacated our order, and remanded for further consideration in light of Mayo. Ultramercial III, 772 F.3d at 713. On remand, we again reversed the district court, holding yet again that the claims were patent-eligible. Ultramercial v. Hulu, 722 F.3d 1335, 1354 (Fed. Cir. 2013) (“Ultramercial II”). Once more, the Supreme Court granted WildTangent’s petition for certiorari, vacated our order, and remanded, this time for further consideration in light of Alice. Id. On this further remand, with the “added benefit of the Supreme Court’s reasoning in Alice,” we affirmed the district court and found the claims to be not patent-eligible. Id. Our conclusion was expressly based on Alice’s holding that “adding a computer to otherwise conventional steps does not make an invention patent-eligible.” Id. at 713, 716–17.

Ultramercial III demonstrates that a § 101 defense previously lacking in merit may be meritorious after Alice. This scenario is most likely to occur with respect to patent claims that involve implementations of economic arrangements using generic computer technology, as the claims do here. For example, the asserted claims of the ’694 patent require use of a “computer system” or “computer network” for facilitating anonymous loan shopping and the asserted claim of the ’728 patent requires “programmatically generating” and uses a “network” for shopping for loans. In this context, it was not an abuse of discretion to allow Appellees to inject a § 101 defense into the case after Alice.

= = = = =

[1] U.S. Patent Nos. 7,366,694 (“’694 patent”) and 7,680,728 (“’728 patent”).

[2] Mortgage Grader, Inc. v. Costco Wholesale Corp., 89 F. Supp. 3d 1055, 1065 (C.D. Cal. 2015) (Costco was later dismissed as a party).

[3] Mortgage Grade, Inc. v. First Choice Loan Services, ___ F.3d ___, App. No. 15-1415 (Fed. Cir. 2016) available at http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/15-1415.Opinion.1-15-2016.1.PDF.

[4] Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S. Ct. 1289 (2012) (as clarified by Alice).

[5] Claim 1 of the ‘694 patent, that the court found sufficiently representative is listed as follows:

1. A computer-implemented system for enabling borrowers to anonymously shop for loan packages offered by a plurality of lenders, the system comprising:

a database that stores loan package data specifying loan packages for home loans offered by the lenders, the loan package data specifying, for each of the loan packages, at least a loan type, an interest rate, and a required borrower credit grading; and

a computer system that provides:

a first interface that allows the lenders to securely upload at least some of the loan package data for their respective loan packages to the database over a computer network; and

a second interface that prompts a borrower to enter personal loan evaluation information, and invokes, on a computer, a borrower grading module which uses at least the entered personal loan evaluation information to calculate a credit grading for the borrower, said credit grading being distinct from a credit score of the borrower, and being based on underwriting criteria used by at least some of said lenders;

wherein the second interface provides functionality for the borrower to search the database to identify a set of loan packages for which the borrower qualifies based on the credit grading, and to compare the loan packages within the set, including loan type and interest rate, while remaining anonymous to each of the lenders and without having to post a request to any of the lenders, said second interface configured to display to the borrower an indication of a total cost of each loan package in the set, said total cost including costs of closing services not provided by corresponding lenders;

and wherein the computer-implemented system further enables the borrower to selectively expose at least the personal loan evaluation information to a lender corresponding to a selected loan package.

Pending Supreme Court Patent Cases 2016 (January 20 Update)

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by Dennis Crouch

This week, the Supreme Court granted certiorari in the administrative patent review case of Cuozzo v. Lee. Cuozzo raises the following two questions: (1) Whether the court of appeals erred in holding that, in inter partes review (IPR) proceedings, the Patent Trial and Appeal Board may construe claims in an issued patent according to their broadest reasonable interpretation rather than their plain and ordinary meaning; and (2) whether the court of appeals erred in holding that, even if the Board exceeds its statutory authority in instituting an IPR proceeding, the Board’s decision whether to institute an IPR proceeding is judicially unreviewable. The petitioner (Cuozzo) now has forty-five days to file its opening merits brief with amici briefs due one week later.

The other major patent issue before the court this term involves the enhanced damages questions raised in the parallel cases of Halo and Stryker. Oral arguments are set for those cases for February 23, 2016. Although not a party, the Solicitor General has requested permission to participate in oral argument as amicus curiae and for divided argument filed. The US Government generally supported the petitioners’ position that the Federal Circuit has unduly limited the availability of enhanced damages for willful infringement and other egregious acts by an adjudged infringer.

This week, the Supreme Court also issued a GVR in Medtronic v. NuVasive – ordering the Federal Circuit to reconsider whether the mens rea evidence presented was sufficient to prove active inducement under Commil.

1. Petitions Granted:

2. Petitions Granted with immediate Vacatur and Remand (GVR)

3. Petitions for Writ of Certiorari Pending:

  • Design Patents: Samsung Electronics Co. v. Apple Inc., No 15-777 (design patent scope and damages calculation)
  • Inducement: Life Technologies Corporation, et al. v. Promega Corporation, No. 14-1538 (whether an entity can “induce itself” under 271(f)(1))(CVSG, awaiting government brief)
  • Inducement: Arthrex, Inc. v. Smith & Nephew, Inc., et al., No. 15-559 (Commil re-hash – if actions were “not objectively unreasonable” can they constitute inducement?)
  • Post Grant Admin: Achates Reference Publishing, Inc. v. Apple, Inc., et al., No. 15-842 (IPR institution decisions unreviewable, even when addressed in a final written decision by PTAB)
  • Post Grant Admin: Interval Licensing LLC v. Michelle K. Lee, No. 15-716 (Can the Patent and Trademark Office appropriately apply the “broadest reasonable interpretation” standard in construing patent claims in post-grant validity challenges?)
  • Claim Construction: Universal Lighting Technologies, Inc., v. Lighting Ballast Control LLC, No. 15-893 (intrinsic vs extrinsic evidence for claim construction).
  • Preclusion or Jurisdiction: Vermont v. MPHJ Technology Investments, LLC, No. 15-838 (Federal court jurisdiction in anti-troll consumer protection case)
  • Preclusion or Jurisdiction: Alexsam, Inc. v. The Gap, Inc., No. 15-736 (appellate jurisdiction over patents that were dropped from case pre-trial) (New Petition)
  • Preclusion or Jurisdiction:
    ePlus, Inc. v. Lawson Software, Inc., No. 15-639 (what happens with a finally-determined permanent injunction after PTO cancels the patent claim?)
  • Preclusion or Jurisdiction: Biogen MA, Inc. v. Japanese Foundation for Cancer Research, et al., No. 15-607 (Whether AIA eliminated federal district courts’ jurisdiction over patent interference actions under 35 U.S.C. § 146.)
  • Eligibility Challenges: Retirement Capital Access Management Company, LLC v. U.S. Bancorp, et al., No. 15-591 (Whether subject matter eligibility under 35 U.S.C. § 101 is a ground specified as a condition for patentability under 35 U.S.C. § 282(b)(2))
  • Claim Construction: Media Rights Technologies, Inc. v. Capital One Financial Corporation, et al., No. 15-725 (Claim Construction: whether there a strong presumption against construing terms as subject to 35 U.S.C. § 112p6 that do not recite the term “means.”)
  • Patent Term Adjustment Dispute: Daiichi Sankyo Company, Ltd. v. Michelle K. Lee, No. 15-652 (Patent Term Adjustment – whether the 180 day deadline applies; could bleed into admin law issues)
  • Damages: STC, Inc. v. Global Traffic Technologies, No. 15-592 (Whether marking the packaging of a patented article with patent notification satisfies the marking provision of 35 U.S.C. § 287(a) where the patented article itself is undisputedly capable of being marked.)
  • Damages: Innovention Toys, LLC v. MGA Entertainment, Inc., et al., No. 15-635 (Stryker/Halo follow-on – potential wait-and-see)

3. Petitions for Writ of Certiorari Denied:

  • Alps South, LLC v. The Ohio Willow Wood Company, No. 15-567
  • Allvoice Developments US, LLC v. Microsoft Corp., No. 15-538
  • OIP Technologies, Inc. v. Amazon.com, Inc., No. 15-642
  • Fivetech Technology Inc. v. Southco, Inc., No. 15-381
  • Tyco Healthcare Group LP, et al. v. Ethicon Endo-Surgery, Inc., No. 15-115
  • Nautilus, Inc. v. Biosig Instruments, Inc., No. 15-561
  • Chunghwa Picture Tubes, Ltd., et al. v. Eidos Display, LLC, et al., No. 15-288
  • Kenneth Butler, Sr. v. Balkamp Inc., et al., No. 15-273    
  • Arthrex, Inc. v. KFx Medical Corporation, No. 15-291
  • Daiichi Sankyo, Inc., et al. v. Apotex Inc., No. 15-281
  • Mylan Pharmaceuticals Inc. v. Apotex Inc., No. 15-307
  • Luv N’ Care, Ltd. v. Munchkin, Inc., No. 15-242
  • Automated Merchandising Systems, Inc. v. Michelle K. Lee, Director, United States Patent and Trademark Office, No. 15-326
  • I/P Engine, Inc. v. AOL Inc., et al., No. 14-1358
  • Interval Licensing LLC v. AOL Inc., et al., No. 14-1362
  • Content Extraction and Transmission LLC v. Wells Fargo Bank, National Association, et al., No. 14-1473
  • W.L. Gore & Associates, Inc. v. Bard Peripheral Vascular, Inc., et al., No. 15-41
  • NetAirus Technologies, LLC v. Apple Inc., No. 14-1353
  • Muffin Faye Anderson v. Kimberly-Clark Corporation, No. 14-10337
  • MobileMedia Ideas LLC v. Apple Inc., No. 15-206
  • SpeedTrack, Inc. v. Office Depot, Inc. et al., No. 15-461 (Kessler doctrine)
  • Rodney K. Morgan, et al. v. Global Traffic Technologies LLC, No. 15-602
  • Lakshmi Arunachalam v. JPMorgan Chase & Co., No. 15-691

4. Prior versions of this report:

 
 

Supreme Court Orders FedCir to reconsider Medtronic Lawsuit

Patent

The Supreme Court has issued a GVR order in Medtronic v. NuVasive and ordered the Federal Circuit to consider how Commil impacts the case.

The petition for a writ of certiorari is granted. The judgment is vacated, and the case is remanded to the United States Court of Appeals for the Federal Circuit for further consideration in light of Commil USA, LLC v. Cisco Systems, Inc., 575 U. S. ___ (2015).

In its petition, Medtronic had directly requested for the Supreme Court to issue this GVR – Grant-Vacate-and-Remand order.

The primary holding of Commil is that belief-of-patent-invalidity is not a defense to allegations of inducement.  Relevant for Medtronic, the Supreme Court also indicated in Commil that inducement requires proof that the accused inducer knew that the actions being induced constituted patent infringement.  Those statements from the Supreme Court have been seen as clearing up some uncertainty following Global-Tech.

Although Medtronic did know of the patent at issue, the patentee apparently did not prove that the defendant “knew surgeons using its [accused] NIM-Eclipse medical device during spinal surgery would infringe NuVasive’s patent.”  Rather, Medtronic argues that it “reasonably believed using its NIM-Eclipse device during surgery did not infringe under a proper reading of the patent claims.”

The case will likely serve as a bellwether indication of how the Federal Circuit will work through the mens-rea requirements for inducement post Commil and Global Tech.

 

Samsung v. Apple: Functional Design Patents and Profit Disgorgement

Patent

by Dennis Crouch

Six amici briefs have now been filed in support of Samsung’s petition for writ of certiorari in its design patent defense against Apple.  

Law Professor Brief: [SamsungLemley] In a petition primarily drafted by Professors Mark Lemley and Mark McKenna, and filed by Lemley, a group of 37 law professors strongly support Samsung’s position that design patent rights should be severely limited. The brief first looks at design patent scope and argues that design patent rights should only be permitted to cover non-functional and ornamental aspects of a product.  “Crucially, design patents protect only ornamentation. They may not cover the functional aspects of a product.”  As I and others have written, the functionality limitation in design patents is much weaker than that of trademark and copyright law.  The brief argues, however, that those regimes should be squared so that utility patent remain the sole domain of for the protection of functional design elements.  “Giving a design patent owner control over utilitarian features undermines the policy goals of the [trademark] functionality doctrine.”

Regarding damages, the brief argues that entire-profit-disgorgement for design patent infringement “makes no sense in the modern world”,  leads to “absurd results”, is “draconian”, and is not required by the statute.   Remember, the idea here is that Apple is collecting all of Samsung’s profits on its infringing Galaxy phones even though only some of the components of the devices infringe.

Public Knowledge and the Electronic Frontier Foundation: [SamsungPKEFF] PK and the EFF argue that we are likely to move into a world of design-patent-trolls filled with “abusive [design] patent litigation.”  PK also suggest a constitutional crisis – that these high damage awards for design patent infringement may violate the Fifth and Fourteenth Amendments (due process).   For part of their argument, the groups quote my 2010 design patent article where I wrote that  “design patent prosecution is a relatively quick, inexpensive, and assured process without substantive examination as compared with either utility patent prosecution or trade
dress registration.”  From my analysis, they reached the conclusion that “the low-quality patent concerns common with abusive utility patent litigation are even more so present with design patents.”

CCIA: [SamsungCCIA]  Although less-so than PK and EFF, the CCIA is fairly consistent in arguing for narrower patent rights.  Here, the organization makes the argument that entire-profit-disgorgement raises constitutional questions by going beyond the “exclusive Right to their respective … Discoveries.”

Systems, Inc: [SamsungSystems] Longtime patent litigator Philip Mann filed a brief on behalf of Systems who is litigating design patent damages issues.  The brief outlines several examples of how the profit disgorgement rule is having a “very real and accelerating” negative impact on  the business community. The brief cites its own case of Nordock v. Systems as well as Pacific Coast Marine Windshields v. Malibu Boats and Microsoft v. Corel.

Tech Companies: [SamsungTech] A group of oft-patent-defendants, including eBay, Dell, Facebook, Google, HP, and NewEgg joined together in a brief arguing for a narrowed interpretation of ‘article of manufacture’ from Section 289 rather than focusing on the entire retail product.

Marginalized Americans: [SamsungHLF] A set of groups that self-identify as “communities that are marginalized in American society” have filed a brief arguing that these strong design patent rights threaten to raise retail prices and limit access to affordable new technology, including smartphones and internet access.

Guest Post: Why we Need a Seizure Remedy in the Defend Trade Secrets Act

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Guest post by James Pooley.  Pooley is the former Director General of WIPO. He recently testified at the Senate Judiciary Committee in favor of the Defend Trade Secrets Act. See his earlier Patently-O guest post here.

INTRODUCTION

In a recent essay published in the Washington and Lee Law Review Online,[1] Professor Eric Goldman of the Santa Clara University School of Law criticized the ex parte seizure provisions of the Defend Trade Secrets Act (“DTSA”), which is pending before Congress in identical Senate (S.1890) and House (H.R.3326)  bills. In his view, the legislation is unnecessary, unprecedented, and carries an unacceptably high risk of abuse and collateral damage.

I strongly disagree. Trade secrets face far different threats in the digital age, and having federal courts able to intervene immediately in cross-border cases is critical. In exceptional circumstances, impoundment of a secret by the court will do what this sort of remedy has always done: get the property out of the hands of someone who threatens to destroy it or flee the jurisdiction, so that the matter can be heard on notice before the harm occurs. The seizure provisions of the DTSA have been carefully constrained to prevent abuse, to minimize harm, and to discourage any but the most compelling applications.

SEIZURE PREVENTS TRADE SECRET LOSS BEFORE IT HAPPENS

Most trade secret theft can be adequately addressed with preventive orders entered after a noticed hearing. This is because most actors in these cases can be expected to follow the orders of a court, and because our legal tradition values notice and the higher quality of information that is produced by the adversarial process.

Notwithstanding that preference, as we all learned in civil procedure class, courts in extraordinary cases may act without giving notice because of an acute danger to someone or something. This has been true across the range of legal disciplines, including trade secrets, and the majority of state laws, as well as the Federal Rules, have acknowledged this by articulating the high bar that a plaintiff has to meet before any matter can be heard ex parte. While that bar is necessary to ensure the case is exceptional, the flip side of the coin is that the harm to be avoided is irreparable.

Professor Goldman argues that the DTSA will be useless against the thief who plans to hijack information over the Internet, or who is on his way to the airport with the secrets in his pocket. But these scenarios only prove the need for a federal remedy: when a trade secret owner discovers that such a thing is about to occur, he can’t waste time figuring out what some county court might do. If there is a chance that a surprise intervention by law enforcement can prevent the loss, it is a federal court that is in the best position to respond and to deliver process that works across state lines. Like a terrorist attack, we can only hope to be vigilant and discover it before the button is pushed. But when we do have that kind of information, we also should be able to deploy the most effective tools to prevent the harm. In the right circumstances, one of those tools should be law enforcement, acting under the guidance and supervision of a federal court, to take temporary possession of the trade secret. That is the focus of the DTSA seizure provisions.

EX PARTE SEIZURE FOR TRADE SECRETS IS NOT “UNPRECEDENTED”

In his essay, Professor Goldman asserts that the seizure provisions “would represent an unprecedented innovation. No state trade secret law has a trade secret-specific ex parte seizure process [that is] similar . . . .” This stretches the meaning of “unprecedented” pretty far. He gets away with it only because the second sentence is so narrowly drawn, claiming only that no state has a “trade secret-specific ” process. But that doesn’t mean that states have not used broadly applicable seizure procedures in trade secret cases. In fact they have, although they may call them by another name, such as sequestration, or attachment. Texas, for example, allows for ex parte sequestration in a variety of circumstances, and it has been applied in at least one case to software. See Glenn, Ex-Parte Seizure of Intellectual Property Goods, 9 Tex. Intell. Prop. L.J. 307 (2001) (discussing Tex. Civ. Prac. & Rem. Code §62.001, and Learn2.com, Inc. v. Bell, 2000 U.S. Dist. Lexis 14283 (N.D. Tex. July 20, 2000)).

Moreover, the UTSA itself includes § 2(a), which “authorizes mandatory injunctions requiring that a misappropriator return the fruits of misappropriation to an aggrieved person, e.g., the return of stolen blueprints or the surrender of surreptitious photographs or recordings.” Commissioners’ Comment, 14 U.L.A. at 451. While the Act doesn’t expressly authorize granting such injunctions ex parte, neither does it prohibit them. Again, the circumstances justifying issuance of an order without notice have traditionally been defined by local rules in state courts and by FRCP Rule 65 in federal courts.

Indeed, Professor Goldman acknowledges that trade secret owners “already may seek ex parte TROs, including impoundment,” under FRCP Rule 65, reinforcing this with the statement that “existing federal TRO procedures already provide for ex parte seizures for trade secret owners.” He finds this authority in the Committee Notes to the 2001 amendments, which explains that “impoundment may be ordered on an ex parte basis under subdivision (b) [of Rule 65] if the applicant makes a strong showing of the reasons why notice is likely to defeat effective relief.” While he uses this reference to argue that the DTSA seizure provisions are unnecessary, it directly contradicts his claim that they are “unprecedented.”

DTSA SEIZURE PROVISIONS ARE BUILT ON THE LANHAM ACT

Another reason why the “unprecedented” argument fails is that the DTSA seizure language was directly patterned on the Lanham Act, 15 U.S.C. §1116(d), expressly authorizing ex parte seizure and impoundment of counterfeit goods. As a condition of such an order, the statute requires that it clearly appear from specific facts sworn by the applicant that some other order would not be adequate, that the applicant is likely to succeed on the merits, that immediate and irreparable injury will occur without the order, and that the “matter to be seized” is located at a specific place. Execution of an order has to be by law enforcement, and seized materials must be held by the court in accordance with a protective order to prevent disclosure of confidential information. The plaintiff must be prohibited from publicizing the order or getting access to the defendant’s trade secrets in the course of the seizure. Finally, a hearing has to be held between ten and fifteen days later, at which the plaintiff will have the burden to demonstrate continuing justification for the order.

The DTSA imposes all of these same restrictions, but adds more. Only property “necessary to prevent propagation or dissemination of the trade secret” can be seized. This means, for example, that records and other evidence of the acts of misappropriation or misuse cannot be taken away, thereby reducing the risk of disruption to the defendant’s other business operations. In fact, the court is specifically required to order only “the narrowest seizure of property necessary” and to provide that the seizure “be conducted in a manner that . . . does not interrupt the legitimate business operations of the [defendant] that are unrelated to the trade secret that has allegedly been misappropriated.”

As with other predicate requirements, the plaintiff’s showing must “clearly” demonstrate “from specific facts” that the information is a trade secret, that the target of the seizure has the secret in their possession, and that if notice were given the target “would destroy, move, hide, or otherwise make such matter inaccessible to the court . . . .” (This latter requirement provides assurance to cloud vendors and others who might be holding information for someone accused of misappropriation.) And the merits hearing must be held no more than seven days later (not ten to fifteen as in the Lanham Act), during which time anyone affected by the order may move to modify or dissolve it.

THE RISK OF ABUSIVE SEIZURE IS LOW AND WELL MITIGATED BY DTSA

So it should be obvious – particularly to any practitioner that has tried to convince a federal judge to issue any sort of ex parte order – that getting relief under this section will be very, very difficult. And while making it hard to get is the first line of defense against abuse of any legal process, the legislation provides serious consequences in case it turns out that the plaintiff was wrong. In the first instance, the court has to require a bond adequate “for the payment of the damages that any person may be entitled to recover as a result of a wrongful or excessive seizure” or attempted seizure. But the amount of the bond is only a guarantee and “shall not limit the recovery” of damages for wrongful seizure. Those damages are expressly tied to the Lanham Act, 15 U.S.C. § 1116(d)(11), which includes lost profits, cost of materials, loss of good will, punitive damages where bad faith is shown, and attorneys fees.

In other words, the risk analysis that any litigant must do before requesting a seizure remedy is not just that it might try and fail – although in my experience that is a very likely outcome – but that if it succeeds in getting the order it may be found to have oversold its case. Federal judges are not known for suffering fools gladly, and in addition to the opportunity to impose liability for damages they have Rule 11 sanctions in their tool kit. Therefore we can reasonably assume that the vast majority of counsel will exercise good judgment in discouraging marginal applications, and that to the extent any abusive behavior occurs, appropriate consequences will be imposed, just as they have been in other areas of the law.

CONCLUSION

Professor Goldman envisions the future without giving sufficient weight to the past or present. Of course there is risk involved in this as in all other processes run by humans. The relevant questions are: how important is the goal, how serious are the risks, and what can be done — informed by our analogous experience — to mitigate those risks to an acceptable level? By any objective measure, the authors of the DTSA have done their job well, and we have reliable answers.

The goal — having a federal resource that matches the modern threat of irreparable harm to an essential industrial asset — is critically important, not just for the limited number of cases where the tool will be used, but also for those that will not mature into problems because it is there. The abstract risk of meritless, abusive applications to federal courts must of course be acknowledged, but our experience with similar procedures shows what it takes to discourage such behavior. And the measures written into the seizure provisions of the DTSA — demanding the greatest care and judicial scrutiny possible and imposing very serious consequences for getting it wrong — provide a generous margin of comfort to conclude that seizures will happen only where necessary and where properly controlled to minimize harm.

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[1] http://ssrn.com/abstract=2697361.

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The Maling Decision from Massachusetts on Subject Matter Conflicts

Ethics, ,

In late December, the high court of Massachusetts issued a decision in Maling v. Finnegan, Henderson.  The decision is accessible, if you search for “Maling,” here.

Boiled down, the court affirmed the grant of the firm’s Rule 12(b)(6) motion to dismiss a complaint that in broad terms alleged that the Finnegan firm had a conflict because it represented the plaintiff and another client in obtaining patents claiming screwless eyeglass hinge inventions.  There are two broad issues:  when is prosecution of patents for one client adverse to another, and when are two patent applications so close that prosecuting them creates a material limitation on the lawyer’s ability to represent either client.

With respect to adversity, this form of conflict is sometimes viewed as a “finite pie” conflict, where two clients are fighting for a resource that cannot meet both their demands.  In Maling, the court relied on a case that I’ve cited for two decades now that involved a firm representing two companies each pursuing a license to a radio channel.  The court reasoned there that so long as they were not fighting over the same channel, and there was no electrical interference between the two channels, there was no direct adversity and so no conflict.  By analogy, the court’s essential holding was that unless patent claims interfere or are to obvious variations of each other, there is no direct adversity.  (The court also noted that giving an infringement opinion to one client about another client’s patent would be adverse, but that was not alleged, apparently, here.)

With respect to material limitations, this form of conflict arises when a lawyer’s obligations to anyone (including himself) precludes him from competently representing a client.  The basic test is:  imagine what a lawyer without the “obligation” would do; and then ask whether the obligation the allegedly conflicted lawyer had would result in a material limitation.  Simple example:  if a lawyer represents a car wreck plaintiff, the lawyer generally cannot cross-examine that plaintiff even in an unrelated matter if it doing so would involve, say, exposing eyesight problems that could be used against the plaintiff in the car wreck. The court in Maling contrasted the allegations in the complaint to situations where firms have shaved claims for one client to avoid another client’s patent.  There was nothing like that here, and nothing like what the court suggested might otherwise be a material limitation.

The court ended with admonitions to lawyers to be sure to monitor for conflicts carefully.  I’ll end by noting that this is not the first, or last, word on this topic.

“Be careful out there,” as they said in Hill Street Blues.

 

Supreme Court grants Certiorari in Challenge of Inter Partes Review Proceedings

Patent, , , , ,

by Dennis Crouch

The Supreme Court has granted writ of certiorari in the pending Inter Partes Review challenge of Cuozzo Speed Tech v. Lee, Docket No. 15-446. 

Questions Presented:

  1. Whether the court of appeals erred in holding that, in IPR proceedings, the Board may construe claims in an issued patent according to their broadest reasonable interpretation rather than their plain and ordinary meaning.
  2. Whether the court of appeals erred in holding that, even if the Board exceeds its statutory authority in instituting an IPR proceeding, the Board’s decision whether to institute an IPR proceeding is judicially unreviewable.

Nine briefs amici were filed at the petitions stage. I expect that number will double for the merits stage.

More from Patently-O on the case: https://patentlyo.com/?s=cuozzo

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The court also granted certiorari for a second time Kirtsaeng v. John Wiley. This time, the focus is on the award of attorney fees to the prevailing party in copyright cases.

Question Presented:

What constitutes the appropriate standard for awarding attorneys’ fees to a prevailing party under section 505 of the Copyright Act.

Section 505 (17 U.S.C. 505) states that: “the court may also award a reasonable attorney’s fee to the prevailing party as part of the costs.”  However, there is a circuit split as to when it should be awarded. According to the petition:

The Ninth and Eleventh Circuits award attorneys’ fees when the prevailing party’s successful claim or defense advanced the purposes of the Copyright Act. The Fifth and Seventh Circuits employ a presumption in favor of attorneys’ fees for a prevailing party that the losing party must overcome. Other courts of appeals primarily employ the several “nonexclusive factors” this Court identified in dicta in Fogerty v. Fantasy, Inc., 510 U.S. 517, 534 n.19 (1994). And the Second Circuit, as it did in this case, places “substantial weight” on whether the losing party’s claim or defense was “objectively unreasonable.” Matthew Bender & Co. v. W. Publ’g Co., 240 F.3d 116, 122 (2d Cir. 2001).

 As a reminder, in Kirtsaeng I, the Supreme Court ruled that copyright exhaustion (first sale doctrine) applies to international sales of the copyrighted work that were lawfully made abroad.  This rule is opposite to that in patent cases (Jazz Photo), but the issue is core to the pending en banc Lexmark case. A decision is expected any day in Lexmark.

Lighting Ballast at the Supreme Court: The Role of Extrinsic Evidence in Claim Construction

Patent, ,

by Dennis Crouch

In Lighting Ballast, construction of the claimed “voltage source means” has been the subject of five different court opinions. Three interpreted the claim term as a means-plus-function limitation and the other two found it not to be in MPF form.  The distinction is important for the case because it serves as a validity trigger.  The patent specification did not describe an embodiment of the voltage source means and so the term would necessarily be deemed indefinite if interpreted as an MPF under 35 U.S.C. 112¶6 (now renumbered as section 112(f)).

The five prior decisions included a district court reversing itself and then being re-reversed by the Federal Circuit panel whose decision was reaffirmed by an en banc Federal Circuit. Finally, after an opinionless post-Teva vacatur (GVR) from the Supreme Court, the Federal Circuit reversed course again and gave deference to the district court’s fact-finding.  The result of this last judgment was to reinstate the final district court determination that a person of skill in the art would interpret the term as connoting a structural element and thus not a pure “means” claim. This was a win for the patentee.

Now, the adjudged infringer Universal Lighting has petitioned the Supreme Court for a writ of certiorari with the following question presented:

When and how can expert testimony or other extrinsic evidence be used to avoid the construction of a patent claim otherwise dictated by the patent’s intrinsic record, including in particular to avoid the restrictions imposed by 35 U.S.C. §112 ¶ 6 on functional claiming?

The original lighting ballast issue focused on appellate deference – an issue largely decided by the Supreme Court in its 2015 Teva v. Sandoz decision.  Markman was also a case focused on process (judge vs jury).  As presented here, the case has the potential of shifting to substance of claim construction.  If it takes the case, the court will almost certainly need to delve into the goals and purposes of claim construction and the inherent conflicts between a claim’s most literal meaning, its drafter’s intended meaning, and the notice of scope provided to the world.

The brief was drafted by Steven Routh and his team at Orrick who also represented ULT at the Federal Circuit. Read the petition here: https://patentlyo.com/media/2016/01/LightingBallastPetition.pdf.

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I used this case as the subject of last fall’s Patent Law Moot Court Competition (sponsored by McKool Smith) and most of the arguments centered around this same issue of whether the expert testimony that a engineers understand Voltage Source Means as a structural term of art (a Battery or Rectifier) was sufficient to overcome the strong presumption that accompanies the use of the term “means.”  The students also debated whether, following Williamson v. Citrix, any such presumption should still exist.

TC Heartland: Next Step in Limiting Patent Venue and Jurisdiction

Patent,

In the pending mandamus action of TC Heartland, the merits panel has taken one step forward by ordering oral arguments – set for March 11, 2016.  Although the order was a per curiam decision by the Merits Panel, it does not, on its face, reveal the identity of the three judge panel. The petition asks the Federal Circuit to change its rule on patent venue and personal jurisdiction.  If the petitioner here wins, we could see a dramatic shift in the geographic distribution of patent cases.  In other words, it would become much more difficult to bring an infringement action in the ongoing hot-spot of the Eastern District of Texas.

More on the case from Patently-O: https://patentlyo.com/?s=Heartland

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As I’ve written before, the actual venue and jurisdiction issues in the case are both important and fascinating.  My question on this ruling stems from the secrecy — that the merits panel issued an order without revealing the identity of the panel members.  [OK – a couple of folks have convinced me that this secrecy is proper (or at least SOP) since the court did not make any substantive decisions but only provided notice of oral arguments.]

 

 

IPR Challenge Moves Forward with One Step Back

Patent, ,

by Dennis Crouch

In a non-precedential order, the Federal Circuit has rejected Carl Cooper’s challenge to constitutional propriety of the inter partes review (IPR) system as implemented by the USPTO.  The identical issues had already been decided in MCM v. HP (Fed. Cir. 2015). In that case, the Federal Circuit held that the IPR system does not violate Article III of the U.S. Constitution nor does it violate the Seventh Amendment of the U.S. Constitution.  As I wrote in December, the MCM decision “essentially forecloses Carl Cooper’s parallel proceedings.”

Cooper had originally filed his appeal in the 4th Circuit Court of Appeals, but that court bumped the case to the Federal Circuit.

Of interest, Cooper himself motioned for summary affirmance, but has reserved his right to raise the appeal. In his filing on Cooper’s behalf, Rob Greenspoon wrote:

While Appellants strongly disagree with the Court’s decision in MCM Portfolio that IPR proceedings are constitutional, Appellants concede that because the issues in this appeal are closely related to those in MCM Portfolio, summary affirmance is appropriate. See United States v. Fortner, 455 F.3d 752, 754 (7th Cir. 2006) (“[S]ummary affirmance may be appropriate when a recent appellate decision directly resolves the appeal.”) (citing United States v. Young, 115 F.3d 834, 836 (11th Cir.1997) (per curiam)). In the interests of preserving the Court’s and the parties’ resources, Appellants respectfully request that this Court grant summary affirmance of the district court’s judgment. In making this request, Appellants preserve all rights to subsequent review.

Next stop appears to be en banc petition or petition for writ of certiorari.

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