Failure to Disclose Pre-Filing Service Contract == Inequitable Conduct

by Dennis Crouch

In Energy Heating v. Heat On-The-Fly, the Federal Circuit affirmed the lower court’s holding that Heat On-The-Fly’s U.S. Patent No. 8,171,993 is unenforceable due to inequitable conduct.

The underlying invention involves a portable system for preparing a heated water and proppant (e.g. sand) mixture for use in hydraulic fracing.  Mr. Hefley, sole inventor and founder of Heat On-The-Fly, filed his priority provisional patent application back in September 2009 that eventually led to the ‘993 patent.

The problem:  By September 2008 (one year before filing), Heafly and his company had provided his services to dozens of “frac jobs” — collecting almost $2 million in revenue.

Mr. Hefley admitted at trial that he and his companies used water-heating systems containing all the elements of claim 1 on at least 61 frac jobs before the critical date. The court further found that invoices reflected that Mr. Hefley’s companies collected over $1.8 million for those pre-critical date heat-on-the-fly services.

Those pre-filing jobs were not disclosed to the USPTO while the ‘993’s application was pending – even though they appear quite material under 102(b) (Pre-AIA).

35 U.S.C. 102(b) (Pre-AIA) A person shall be entitled to a patent unless — (b) the invention was ... on sale in this country, more than one year prior to the date of the application for patent in the United States.

Under Pfaff, the “on sale” bar requires (1) a “commercial” sale or offer and (2) the invention be “ready for patenting.” Pfaff v. Wells Elecs., Inc., 525 U.S. 55 (1998).  One exception to this rule is for “bona fide experiments.”  In particular, the Federal Circuit has held that experiments to “(1) test the claimed features or (2) determine if the invention would work for its intended use . . . will not serve as a bar.” Citing Clock Spring, L.P. v. Wrapmaster, Inc., 560 F.3d 1317 (Fed. Cir. 2009).

Inequitable Conduct: In the failure-to-disclose context inequitable conduct requires clear and convincing evidence that “the applicant knew of … the prior commercial sale, knew that it was material, and made a deliberate decision to withhold it.” See Therasense.  These issues are determined by the district court judge and given deference on appeal.  Thus, an inequitable conduct finding should only be overturned when based upon a misapplication of law or based upon a clearly erroneous finding of fact.

Here, the patentee argued that the prior uses were “experimental” or at least he thought that they were.  That argument was rejected since the prior uses included all elements of claim 1; that there were no notebooks or other experiment-like-paraphernalia; and that the uses were done openly without any attempt to hide the system or require confidentiality. (Linking these factors to Allen Engineering Corp. v. Bartell Industries, Inc., 299 F.3d 1336 (Fed. Cir. 2002)).  Those elements were more than enough to overcome the experimental-use-defense.

On Attorney Advice: The court also affirmed that Hefley knew of the materiality. On this point, the interesting twist involve’s Hefley’s patent attorney Seth Nehrbass.  Nehrbass was not permitted to testify at trial — but would have apparently testified that the non-disclosure was on attorney advice:

HOTF asserts that Mr. Nehrbass would have testified that Mr. Hefley told him about the 61 frac jobs, but that Mr. Nehrbass decided they were all experimental uses that need not be disclosed.

This testimony might have saved the patent from the inequitable conduct finding.  However, it was properly excluded on prejudice grounds. In particular, up until just before trial Hefley had asserted attorney-client-privilege (including during the Nehrbass and Hefley depositions).  Then, just before trial, Hefley attempted to raise the attorney-advice defense.

We conclude that the district court did not abuse its discretion in excluding Mr. Nehrbass’s testimony. The attorney-client privilege cannot be used as both a sword and a shield. HOTF was the one who asserted the attorney-client privilege in the first instance and was also the one who failed to follow up later by deposing or otherwise making Mr. Nehrbass available for examination prior to trial. HOTF cannot have it both ways. Accordingly, we conclude that the district court did not abuse its discretion in excluding this evidence on HOTF’s advice of counsel defense.

Inequitable conduct affirmed.  Because inequitable conduct wiped-out all of the patented claims, the court did not reach the other patent questions of “obviousness, claim construction, and divided infringement.

Tortious Interference: The jury also found that HOTF was liable for tortious interference.  The facts:

Energy (Appellee) alleges ... that a HOTF employee (Mr. Ron Lyles) had called Triangle [a potential Energy client], informing it that Energy was “infringing on a patent that they had” on the water-heating technology. Wary of the litigation risk, Triangle gave its waterheating jobs to HOTF instead. Based on this testimony, Energy argued to the jury that HOTF tortiously interfered with the prospective business relationship Energy had with Triangle. The jury agreed and awarded Energy $750,000 in damages.

On appeal, the Federal Circuit has affirmed — finding that the evidence presented were sufficient to meet the subjective and objective bad-faith element required to support a tort claim based upon enforcing a patent.  See Adept, Inc. v. Murex Sec., Ltd., 539 F.3d 1354 (Fed. Cir. 2008).

Attorney Fees: Finally, the district court denied the prevailing party attorney fees under Section 285.  That judgment was vacated with a strong suggestion that this is an exceptional case.

14 thoughts on “Failure to Disclose Pre-Filing Service Contract == Inequitable Conduct

  1. 6

    Additional interesting judgment here: “We also affirm the district court’s judgment of tortious interference and denial of remedies under the North Dakota Unlawful Sales or Advertising Practices Act.”

  2. 5

    Fascinating: the patent is invalid because the patented device was on sale more than a year before the earliest filing date. But instead of using that as the basis for its decision, the court rules that the patent is unenforceable because of inequitable conduct. Same effect, I suppose, but I would have liked to see the court say the patent is invalid too.

    1. 5.1

      Based on the admission of the plaintiff, claim1 is invalid. We do not know if all the claims are invalid as anticipated or obvious over the device that was on sale.

      1. 5.1.1

        Good point. IC as to any one claim kills enforcement of all the claims, whereas a 102 statutory bar might not apply to some other claims if they contain additional details disclosed in the patent that were not in the product or method that was on sale or in pubic use more than a year before the filing date.


          I see. In such a case, is the punishment for committing IC i) not severe enough ii) too severe or iii) about right, and proportionate?

          Is that why the evidence of IC has to be so perfect, as a balance against the appalling consequences of being proved to have committed even a smidgeon of IC?


            It certainly is one aspect that Lemley and co. sold in their “It takes a village” plank in the AIA to remove (wholesale) the “with deceptive intent” language from the US Code in order to lessen the impact of the threat of IC on “getting inventorship right” (which by the by was a huge benefit to juristic persons everywhere).

  3. 4

    One general observation on why some patent cases like this occur: A powerful financial incentive to file patent suits with inadequate pre-suit investigations, and insufficient incentives to do so.
    The former is exacerbated by the lack of partnership job security in litigation firms. That is, the constant business pressure to bring in substantial billing opportunities, of which actual litigation is by far the best.
    The latter is exacerbated by imposition of almost all the risks, even including awards of attorney fees, on the client rather than on the the suit attorneys. Also by counting on the statistics of most sued defendants settling rather than persistently defending themselves. In particular, by consistent client failures to obtain informed independent second opinions from patent attorneys other that those who will be billing for the litigation.

    1. 4.1

      A separate but related issue is what attorneys should ethically advise the client to do as soon as soon as the above statutory bar facts become clear during discovery. Proceeding on with the suit and its billings and compounding attorney fee sanction amounts may well not be the best advice.

  4. 3

    Hmm…it looks like the appeals court vacated the fees part on the grounds that the the trial judge had found both sides to have a meritorious/plausible position, and that this would be inconsistent with the rule that there can only be inequitable conduct if the patentee had no other reasonable argument.

    So, if there was indeed an inconsistency, why not remand *both* parts of the case – to let the trial court say which direction it erred in? Why assume the trial judge must have simply misspoken or some such when they said both sides’ arguments had merit? What if that’s the part that’s *true*, in which case any inconsistency should be resolved in the *other* direction?

  5. 2

    Regarding the attorney-advice decision: It’s one thing to say “hey, your attorney chose the wrong strategy and now you’re stuck with it” if it’s just a liability issue or some such, but when it’s something that tarnishes one’s reputation for ethics – technicalities shouldn’t trump the actual pursuit of truth.

    In other words, IF the inventor truly relied in good faith on the attorney’s advice (for the worse), they may indeed be out of luck in some ways, but it shouldn’t extend to something like this.

    Ethical taints should never be “deemed” based on “rules of the game” or the like.

    1. 2.1

      The inventor is not necessarily “out of luck.” This is why attorneys carry malpractice insurance. Likely the on-sale bar will prevent him from proving he would have won this case but for the attorney’s bad advice, but I’m sure he can recover some damages.

  6. 1

    Given the high standard for inequitable conduct, I wish the CAFC could just issue a black letter rule that said all cases where inequitable conduct is found are exceptional. The parties don’t really need to litigate this issue once IC is found. Of course, SCOTUS would say the rule is too rigid and overturn it.

    1. 1.1

      If the inventor really did rely on the attorney advice, and truly did not intend to deceive, then…even though the court decided not to let them make that argument…perhaps the court felt that if it nevertheless was indeed the truth, then awarding attorney’s fees on top of the inequitable conduct would be disproportionate.

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