by Dennis Crouch

The ongoing trade secrecy case between Waymo (Google) and Uber / Otto Trucking centers on former Wamo creative Anthony Levandowski who left in 2016 to form Otto that was then purchased by Uber.  In the case, Waymo has alleged improper solicitation of Google employees and “theft” of 14,000 computer files.  Because the employment agreement includes an arbitration clause, Waymo initiated arbitration against Levandowski, and separately sued Uber in federal court.

Two major preliminary decisions by N.D.Cal. Judge Alsup have been (1) to award a preliminary injunction against Uber and (2) to rule that the Levansdowski employment agreement does not require arbitration of the case against Uber / Otto. The Federal Rules of Procedure permit immediate appeal of both of these interlocutory decisions.  Because the complaint also alleges Uber is infringing one of Waymo’s patents, the appeal goes to the Federal Circuit. (U.S. Patent No. 8,836,922 – invented by Levandowski, et al.).

Now on appeal, Uber is asking the Federal Circuit to reconsider its case for arbitration. Uber writes:

The questions presented on appeal relate to the precise circumstances under which a nonsignatory can use California’s doctrine of equitable estoppel to compel arbitration of claims that are asserted by a party to a contract that contains a broadly inclusive and enforceable arbitration provision.

Uber argues that Waymo is relying heavily upon the Levandowski agreements in order to make its trade secrecy and patent claims (assignor estoppel, for instance) and therefore the equitable approach is to also bind Waymo to the arbitration provisions in the agreement. It appears that the appeal will see expedited briefing and a quick resolution.

The Federal Circuit already ruled once in the case.  In April, the court denied a mandamus petition by Levandowski to block certain discovery against him based upon his claim for 5th Amendment privilege against self incrimination.  (Remember here that trade secret theft is also a crime.)

On the preliminary injunction side, Levandowski was barred further work LIDAR.  Subsequently, Uber fired Levandowski.

Note here: When Levandowski left Uber, he formed Otto Trucking and Ottomotto to develop self-driving vehicles. He was then sued by Clearpath Robotics for trademark infringement – based upon Clearpath’s Otto Motors division – that also develops self-driving material transport vehicles.  That case settled in 2017 and after it acquired Levandowski’s company, Uber dropped the Otto name in favor of Uber ATG.

Docs:

• 2017-06-06 Motion to Expedite Appeal v14

According to folks at the Intellectual Property Owners Association (IPO), current Commissioner for Patents Drew Hirshfeld is moving into the position of Acting Director of the United States Patent & Trademark Office (USPTO).  Hirshfeld is a long-time USPTO employee and is very familiar with both the patenting process and the details of running the multi-billion-dollar-agency.  Congratulations Mr. Hirshfeld on the promotion!

There was some question about whether the position of Acting Director / Undersecretary of Commerce would go to the Patent Commissioner or instead to the current Acting Deputy Director Tony Scardino. According to the USPTO Succession Plan:

If the position of the Under Secretary is vacant, the Deputy Under Secretary shall serve as Acting Under Secretary. If both the Under Secretary and the Deputy Under Secretary positions are vacant, the Commissioner for Patents and the Commissioner for Trademarks, in that order, will perform the functions and duties of the Under Secretary.

Although Scardino has been the “Acting Deputy Under Secretary,” the position of “Deputy Under Secretary” itself is vacant — leading to Hirshfeld being next in line as Commissioner for Patents.

USPTO Director Michelle Lee has announced her resignation — noting that “It has been the professional experience of a lifetime [and] a true privilege serving our country by supporting what I believe to be some of America’s greatest heroes—our inventors and entrepreneurs.”  The resignation appears to be effective immediately. Prior to joining the USPTO, Lee was chief patent counsel for Google, and I expect that Lee will return to high-level industry position.

Lee will be known as a stabilizing force – managing the agency during these tumultuous post-AIA and post-ALICE years.  Although critics suggest that she is not sufficiently pro-patent-property-rights, the PTO has continued to issue a record-number of patents each year.  Although the timing is a surprise, Lee was an Obama appointee and the departure itself is not a surprise.

There has been no word from the White House or Commerce Department on a successor.  It is unclear to me at this point whether Tony Scardino (current acting deputy director) or Drew Hirshfeld (current Commissioner of Patents) will be tapped as Acting Director.

Guest post by Professor Erika Lietzan of the University of  Missouri School of Law.  This is cross-posted on the new FDA Law blog “Objective Intent” created by Professor Lietzan and GSU Law Professor Patti Zettler.

On May 30, the Supreme Court surprised many of us by ruling that exhaustion of U.S. patent rights occurs even when sale of the item takes place in a foreign country.  There is a great deal more to the ruling, and there are now very interesting questions about the characterization of transactions as something other than “sales” and about the use of contractual provisions to prevent resale into the United States following first sale of patented products elsewhere.  But for now, let’s stop with the bare bones description: U.S. patent rights are exhausted when an item is sold overseas.  This means that shipping an already-sold product into the United States for subsequent-sale to a U.S. consumer will not infringe the patents in question.  Depending on how patent owners structure their transactions overseas going forward, this ruling could give U.S. consumers access to products that are intended for foreign markets and that are priced for those markets — lower, for instance.

One of the many topics circulating now: what are the implications for pharmaceutical companies and for U.S. consumers of pharmaceuticals? 

I’m not taking up that issue.  (Professors Lisa Ouellette and Daniel Hemel addressed it in a blog entry cross-posted at Written Description and Whatever Source Derived.  And Professor Sarah Wasserman Rajec touched on it as well, at PatentlyO).

Instead, I am going to demystify the FDA framework that comes in to play.  There are three basic principles to know.

First, it’s illegal to import new drugs that are not FDA approved.  Section 505 of the Federal Food, Drug, and Cosmetic Act (FDCA) prohibits the introduction into interstate commerce of any “new drug” (which includes virtually every prescription drug) that is not the subject of an approved new drug application (NDA) or abbreviated new drug application (ANDA).  Importation counts as introduction into interstate commerce, so the approval requirement applies.  In plain English: it’s illegal to import a new drug that FDA has not approved, and most prescription drugs count as new drugs.

Second, it’s illegal to import the foreign version of a new drug that FDA has approved.  Approval of a new drug is specific to that particular product, made and labeled exactly as described in the application that FDA reviewed. If a product is manufactured in a different facility from the facilities listed in the NDA, or if it is manufactured according to different specifications, it is considered an unapproved new drug — even if it is made by the same company.  (Great explanation from FDA, here.)

To make this more concrete:  Pfizer sells Viagra in the United States under an NDA that FDA has approved.  Pfizer also sells Viagra in Europe.  That drug is marketed pursuant to authorization by the European Commission on the basis of a separate marketing application that complied with European law.  If the European product is made at a facility that is not listed in the U.S. application, or if it is manufactured according to different specifications, or if it is composed differently (different inactive ingredients for instance), then it cannot be imported into the United States.  Certainly it is labeled in accordance with European labeling rules, and the European labeling is not the same as the FDA-approved labeling, so again it cannot be imported into the United States.  In plain English: it’s illegal to import the foreign version of a company’s product, even if that same company sells an FDA-approved version to U.S. consumers.  (The same great explanation from FDA, here.)

Third, all of this is true even if the drug was made in the United States.  Don’t confuse where something was manufactured with which country has approved it. Companies have manufacturing facilities all over the world.  Some drugs available in other countries are manufactured in the United States and then exported.  Some drugs sold here are manufactured (in part or entirely) overseas.  What matters for purposes of importation into the United States is whether the drug fully aligns with an NDA that the U.S. FDA has approved.  If the product in question does not fully align with an approved U.S. new drug application, it is an unapproved new drug and cannot be imported.

Now things get a little more complicated.

You may be wondering . . .

What about so-called “reimportation”?  Aren’t the rules different if the company brings the drug back itself?  Well, yes and no.  A new drug that lacks an approved NDA cannot be imported, period, full stop.  But it is theoretically possible that the FDA-approved product is circulating in another country.  I think this is probably a null set, but let’s suppose it is not.  Suppose there is an FDA-approved product, with FDA-approved labeling, circulating in another country.  Can it be imported?  It depends.

Now it depends on where the drug was made.  Section 801(d) of the statute — which was added in the late 1980s and appears at 21 U.S.C. 381(d) — changes that.  If the product was made here and shipped overseas for a foreign market, and actually happens to be completely identical to the U.S. approved product (complies with the NDA in every respect), then the only company that can bring it back to the United States is the original manufacturer.  (Check the same link as above, for FDA’s explanation.)  We sometimes call these “American goods returned.”

And if that foreign-circulating FDA-approved drug wasn’t made here?  Then, yes, that product can be imported by anyone.  This follows from all of the rules I’ve already explained.

Here is a simpler way of putting it.  The statute prohibits importation of unapproved new drugs.  It permits importation of approved new drugs (as long as they don’t appear adulterated or misbranded), with one exception — American goods returned.  That is: if the product was made here and shipped out of the country, then the only entity permitted to bring it back is the original manufacturer.

What about personal importation?  Isn’t there a de minimis exception?  If you have seen Dallas Buyers Club, you may be wondering, why did FDA allow Woodroof back into the country, once he claimed that all of the boxes in his car were for his personal use?  The answer: it’s not a de minimis exception to the law; it is a long-standing policy of enforcement discretion.  (See section 9-2 of the Regulatory Procedures Manual, here.)

This policy applies if the drug is clearly intended for personal use. (FDA will presume commercial use if the supply exceeds what one person would take in three months, which explains some of the exchange at the border in the movie.)  More importantly for our purposes, the drug has to be intended for treatment of a serious condition for which satisfactory treatment is not available in the United States, and the drug cannot be approved in the United States.  This means: as drafted, the policy does not permit you to bring back a foreign version of a drug that is actually available in the United States.  No Canadian Januvia, for instance.  That said, in practice, FDA doesn’t have the resources (or, I suspect, inclination) to stop those packages.  But the agency does go after middlemen that set up storefronts or websites to facilitate foreign orders.

And it’s important to remember that this is an enforcement discretion policy; importation fully within the four corners of this policy is still illegal.

What about section 804 of the statute: doesn’t it explicitly authorize importation?  Yes, and no.  Here’s section 804.  It directs FDA to promulgate regulations permitting pharmacists and wholesalers to import prescription drugs from Canada. But notice subsection (l): “this section shall become effective only if the Secretary certifies to the Congress that the implementation of this section will (A) pose no additional risk to the public’s health and safety; and (B) result in a significant reduction in the cost of covered products to the American consumer.”  That certification has never happened. So it’s not in effect.

Also, notice that under 804(c) the imports in question must comply with section 505 of the statute.  That’s the approval requirement.  Section 804 is not about importing foreign versions of FDA approved drugs.  It is an “American goods returned” provision.

So where does this leave us?  The bottom line is that it is illegal to import the foreign version of a medicine approved in the United States.

And what does this have to do with Impression Products v. Lexmark?  That might be a post for another day.  But on the question whether the Supreme Court’s decision has thrown open the gates for access to cheaper foreign medicines, the answer is no.  Not so long as the federal government enforces the law that ensures products in the U.S. distribution system are  FDA-approved.  But it may be important to remember that only the government can enforce this.  There is no private right of action under the FDCA.

In its 2014 attorney-fee decisions of Highmark and Octane Fitness, the Supreme Court handed back discretion to lower courts to determine when the “exceptional case” requirement for fee shifting had been met.  Going with that discretion, the Supreme Court ruled also ruled that deference should be given to the determination when appealed.

Interestingly, the two new fee-shifting decisions this week are both reversals – although reaching opposite conclusions on whether fees should be awarded.

• Checkpoint Sys., Inc. v. All-Tag Security S.A.: District Court abused its discretion by finding an exceptional case and awarding fees.
• Rothschild Connected Devices Innovations, LLC v. Guardian Prot. Servs., Inc.: District court abused its discretion by not finding an exceptional case.

Both cases involve successful defendants who requested attorney fees to compensate for their wasted time and money.  The differences between these cases might be the Judges: Judges Newman, Lourie, and Moore deciding Checkpoint Sys in favor of no-fees against the patentee; and Chief Judge Prost, and Judges Wallach and Mayer deciding Rothschild in favor of fees against the patentee.  However, the two cases are also distinguishable on the merits.

In Rothschild, the patentee dismissed its case against ADS after the defendant filed a motion for dismiss on 101 and 102 grounds.  The district court found the case non-exceptional. On appeal, however, the Federal Circuit found that the lower court abused its discretion by failing to (a) expressly consider the defendant’s arguments that Rothschild was willful ignorant of the prior art; (b) consider Rothschild’s pattern of litigation practices as part of the totality of circumstances; and (c) consider exceptional fees under Section 285 as separate and distinct from Rule 11 sanctions.  Judge Mayer added in his concurrence that the complaint was “frivolous on its face” based upon clear failure under Section 101. (Claim 1 of U.S. Patent No. 8,788,090).

In Checkpoint Sys, the district court awarded $6 million in attorney fees following a jury verdict finding that the asserted patent was invalid, unenforceable, and not infringed.  Checkpoint Sys., is also an interesting study case because the original district court opinion awarding fees was Pre-Octane –– that case was rejected in a 2013 Federal Circuit opinion.  Following Octane Fitness, however, the district court again awarded fees — finding that “that Checkpoint’s pre-suit investigation was inadequate” and “improper motivation” behind the lawsuit – that Checkpoint brought suit “to interfere improperly with Defendants’ business and to protect its own competitive advantage” rather than simply to enforce its patent rights.  On appeal here, the court again rejected fee award — this time as an abuse of discretion.  The court particularly rejected the notion that the suit was filed for improper motive: “motivation to implement the statutory patent right by bringing suit based on a reasonable belief in infringement is not an improper motive.”

The legislative purpose behind § 285 is to prevent a party from suffering a “gross injustice”: “The exercise of discretion in favor of [awarding attorney fees] should be bottomed upon a finding of unfairness or bad faith in the conduct of the losing party, or some other equitable consideration of similar force, which makes it grossly unjust that the winner of the particular law suit be left to bear the burden of his own counsel fees.” S. Rep. No. 1503, 79th Cong., 2d Sess. (1946) (addressing the § 70 precursor to § 285); see also Octane Fitness, 134 S. Ct. at 1753 (“The provision enabled [district courts] to address ‘unfairness or bad faith in the conduct of the losing party, or some other equitable consideration of similar force,’ which made a case so unusual as to warrant fee-shifting.” (quoting Park–In–Theatres, 190 F.2d at 142)). We conclude that the district court erred, and thus abused its discretion, in its assessment of “exceptional case,” for the record shows that the charge of infringement was reasonable and the litigation was not brought in bad faith or with abusive tactics. The award of attorney fees under 25 U.S.C. § 285 is reversed.

Despite these two reversals, we do know that there have been an increase in fee awards since the 2017 decision.  I wonder if there is any steady-state percentage (or are these not judged on a curve?).

Guest post by Professor Sarah R. Wasserman Rajec^*

In Impression Products, Inc. v. Lexmark Inc., decided Tuesday, the Supreme Court held that the authorized sale of a patented product, anywhere in the world, exhausts the patent-holder’s rights in that product. The Court overturned Federal Circuit case law holding that post-sale restrictions and foreign sales preserve a U.S. patent-holder’s right to sue for infringement. As a result, Impression Products was not liable for patent infringement when it bought used Lexmark toner cartridges abroad from lawful purchasers, refilled them, and then imported and sold them in the United States, nor did the post-sale restrictions Lexmark placed on its goods give rise to patent infringement liability. Jason Rantanen has written about the decision’s impact on post-sale use restrictions. I will focus on the ruling as regards international patent exhaustion.

The decision that an authorized sale anywhere in the world exhausts a patentee’s rights brings patent law doctrine in line with copyright law and the Court’s 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc.. In that case, the Court held that textbooks lawfully made and sold in Thailand could be imported and sold in the United States without infringing U.S. copyright. Kirtsaeng was not controlling because it involved statutory interpretation as opposed to the purely doctrinal nature of exhaustion in patent law, but many of the policy arguments for copyright apply in the patent context, and many goods are covered by both types of protection. The greater impact of an international patent exhaustion rule, as I have previously argued, is that it makes U.S. patent law more consistent with free trade principles and is likely to increase competition by lowering barriers to trade in patented goods. Companies will no longer be able to use patent rights (without further strategizing, see below) to engage in geographic price discrimination between U.S. and foreign markets, and supply-chain-participants, resellers, and consumers will not be subject to the information costs associated with determining the provenance and travels of all articles of commerce they purchase. These Court makes clear that the third party benefits that ease the flow of commerce were important in coming to its decision, colorfully explaining that:

More is at stake when it comes to patents than simply the dealings between the parties, which can be addressed through contract law. Instead, exhaustion occurs because, in a sale, the patentee elects to give up title to an item in exchange for payment. Allowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation.

Even after looking up “remora,” the opinion leaves open some questions about international trade in patented goods. Some are legal and will likely spur further litigation (e.g., whose authorization is required for an “authorized sale abroad” to occur?) while others are empirical and still speculative (e.g., with geographic price discrimination off the table, what other methods will businesses pursue for price discrimination and control of downstream sales? And, what will the effect of this ruling be on access to medicine?).

First, the legal question: What is an authorized sale abroad?

Who needs to authorize the sale? Will companies be able to get around exhaustion by structuring businesses so that foreign sales are not authorized by the U.S. patent holder?

In its opinion, the Court stated that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose on the location of the sale.” And, more to the point, “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” However, an authorized sale is not the same as a lawful sale—it requires an entity capable of authorization in the United States, and requires that this entity grants authorization in the foreign market. The Court addressed the issue of what will count as an authorized sale in its discussion of Boesch v. Graff, an 1890 case in which the Court ruled that U.S. patent rights were not exhausted by lawful manufacture and sale in Germany. However, in that case, the manufacturer was entitled to make and sell the products under a prior user right in the German patent law which allowed those who were preparing to produce a patented article at the time the patent was filed to do so without authorization. Thus, the Court in Impression Products explained that Boesch merely illustrates “that a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction.”

However, there is a lot of room between Boesch, where the patentee had “nothing to do with” the manufacture and sales and Impression Products, where Lexmark had patent rights in multiple countries and authorized sales abroad. The question remains whether a company structured such that subsidiaries in different countries own the various patent rights will be subject to exhaustion of its U.S. patents for foreign sales made by a foreign subsidiary. The Court seems to imply not, explaining that “only the patentee can decide whether to make a sale that exhausts its patent rights in an item,” and later, “what matters is the patentee’s decision to make a sale.” Yet if it is really the case that only authorization by the U.S. patent-holder will result in exhaustion through foreign sales, the Court has left open a way for patent holders to opt out of international exhaustion. And while courts may interpret “authorized sale” more broadly, to include sales by related entities, the contours of any rule will take some time to be settled.

With geographic price discrimination off the table, what other methods will businesses pursue for price discrimination and control of downstream sales?

I have previously discussed the economic argument for price discrimination, explaining that

The standard economic argument against international exhaustion draws on the potential gains to patent holders and to consumers in low-income countries from geographic price discrimination. This argument describes the current rule as allowing patent holders to market goods worldwide, adjusting prices for countries with lower purchasing power while continuing to reap rewards in high-income countries. An international exhaustion regime, according to this view, will push patent holders either to restrict sales to high-income markets or to offer goods at a globally uniform price, to the detriment of consumers in low-income countries. However, geographical price discrimination is but one of many options for identifying and marketing to populations with differing abilities to pay; many goods, regardless of patent protection, are available in different versions at different prices worldwide. Geographic price discrimination is desirable to firms because of its effectiveness at preventing arbitrage and because enforcement costs are shared by states through customs enforcement. It may not be the most desirable form of price discrimination for consumers, however, because it is imprecise in identifying differing demand curves. This is particularly true for countries with large or growing income disparities. A shift to international exhaustion would likely result in changes in how firms market goods, but would not necessarily entail the wholesale welfare losses that the standard argument suggests, because that argument compares geographic price discrimination with no price discrimination at all.

In other words, the useful comparison is not between geographic price discrimination and no price discrimination, but between geographic price discrimination and the other methods that companies will increasingly turn to following this ruling. If instead of choosing not to sell abroad under the new rule, a company chooses to sell a costly and a cheaper version of a good, the availability of that cheaper version may be a boon to consumers inside the United States that otherwise could not afford the costly version.

Many have suggested that this ruling will lead to more licensing and fewer sales and I generally agree, where that is technologically possible and privity can be maintained. However, one thought I’ve had is that this move towards licensing goods when possible is not isolated to the patent context in any way. That is, licensing of goods may allow companies to price discriminate and control (or stop) downstream sales, and it generally runs counter to the law’s abhorrence for restraints on alienation, but it was on the rise before this case and would be just as desirable (to companies and some consumers) or undesirable (to other consumers and resellers) for goods not covered by patents as for those that are. So while I agree that we’ll see more action in this area as a result of the case, and that the dividing line between licenses and sales is incredibly important to our understanding of ownership and use of modern and emerging technologies, it is not an issue of patent law qua patent law.

What will the effect of this ruling be on access to medicine?

International patent exhaustion presents particular concerns for the advocates of global access to medicines and for the pharmaceutical industry. Because versioning or licensing do not easily apply to the sale of drugs, there is a concern that pharmaceutical companies will refuse to sell medicines at low prices in lower-income markets because of a fear of arbitrage. As a result, patients in lower-income countries would suffer without access to medicine and pharmaceutical companies may reap lower profits to invest back into research and development of new drugs. There are reasons, however, to think that the immediate effect on the pharmaceutical industry and patients worldwide will not and need not be so dire. There are also solid policy reasons to expand the regulatory means of curbing parallel imports in this industry.

Currently, the Food & Drug Administration must approve drugs before they are sold in the United States—both the chemical composition of the drug and its manufacture. The registration of drugs and approval of production processes mean that the FDA serves as a gatekeeper for all who wish to sell drugs in the U.S. market, and an expansion in this role to exclude drugs first sold in least developed countries would not exceed the scope of the agency’s current expertise. And while generally there are good reasons to apply patent law equally to different technology areas, the drug industry may be appropriate for special treatment because it is subject to price controls in so many countries. Thus, while a patent-holding pharmaceutical company may have a choice whether to sell its drug in foreign markets, they have less control over the price than in the United States, which does not have a single-payer system allowing for the strong bargaining power that many countries have. In addition, because the WTO agreement on Intellectual Property, the TRIPS Agreement, allows for countries to issue a compulsory license for patented goods in certain circumstances, drug companies may face foreign sales that they have not authorized. Under these circumstances, the free trade concerns that drive some of the arguments for international exhaustion simply do not apply in that industry. Combined with the highly-regulated nature of drug sales in the United States, this provides a strong argument for treating drugs differently in order to maintain access for foreign patient populations.

Concluding thoughts

Despite the Court’s suggestion that a rule of international exhaustion is consistent with prior doctrine, it is a change in the law as announced by the Federal Circuit and as understood by practitioners and academics. (The historical claim has been challenged for both copyrights and patents.) On the domestic side, we can expect to see even more attempts to structure transactions as licenses rather than sales, while on the international side, I expect that the question of patent-holder authorization will dominate in the near future.

= = = = =

* Assistant Professor of Law, William & Mary Marshall-Wythe School of Law.

Impression v. Lexmark: Patent Rights Exhausted by Sale, Domestic or Abroad

I’ll be part of today’s (June 1, 2017) IPO Webinar discussing the ramifications of the Federal Circuit’s April decision in Helsinn v. Teva at 2:00 pm Eastern Time

Panelists:

• Prof. DENNIS CROUCH, author of the Patently-O blog (University of Missouri),
• Life science litigator DEBORAH FISHMAN (Arnold & Porter Kaye Scholer LLP), and
• Assistant Chief IP-Counsel JENNIFER JOHNSON (DuPont).

Moderator and Organizer of the IP Chat Channel: Pamela Sherrid.

Register Online $$