Automatic Assignment of Future Inventions: A Serious Error of Federal Law that Requires Supreme Court Review

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Guest post by Dr. Shubha Ghosh, Crandall Melvin Professor of Law and Director of the Technology Commercialization Law Program at Syracuse University College of Law

In Stanford v Roche, 563 U.S. 776 (2011), the Supreme Court ruled that the Bayh-Dole Act did not create special rules of patent ownership for universities and other recipients of federal research funding.  Traditional rules of inventor ownership and assignment, developed for for-profit entities applied to research institutes. Nothing in the language of the Bayh-Dole changed the basic rules and created a statutory automatic assignment (one analogous to work made for hire under the Copyright Act).

But what are the traditional rules for patent assignment? One issue the majority ignored in Stanford is the future interest assignment rule created by the Federal Circuit in Filmtec Corp. v. Allied Signal, 939 F.2d 1568 (Fed. Cir. 1991).  By containing the phrase “hereby assigns,” the Federal Circuit stated in Filmtec, an assignment would have priority over another that only contained the word “assigns.” An assignor stating that he “assigns” a future interest is simply conveying a promise to assign in the future. However, the magic phrase “hereby assigns” is a present assignment of a future interest.  Stanford University’s failure to include the word “hereby” in its assignment agreement lost patent rights to Roche, a competing assignee that showed the wisdom to include the word “hereby” in its agreement.

Justices Breyer and Ginsburg in dissent sharply criticized the Filmtec rule of “automatic assignment” through agreement in the Stanford case. This sentiment was echoed in Justice Sotomayor’s concurrence. All three justices, however, recognized that the assignment interpretation issue was not properly before the Court.  Dr. Alexander Shukh, a computer hardware engineer, signed an assignment to his former employer Seagate.  The assignment contained the “hereby” language sanctioned by the Filmtec decision.  Seagate, and the Federal Circuit, reads the hereby language as creating an automatic assignment of Shukh’s rights to his inventions and resulting patents. The Shukh decision does not involve priority of assignments and  goes beyond the Filmtec decision criticized by Justices Breyer, Ginsburg, and Sotomayor.  Under Shukh, the magic words “ hereby assigns” extinguishes all rights of employees in their inventions.

The Court should grant Shukh’s certiori petition. This post demonstrates that there is a serious error of federal law that requires Supreme Court review. It also shows how the Court might correct the misapplication of federal law.

The Federal Circuit created the rule of automatic assignment through agreement without any basis in the Patent Act or in the common law of assignment. Acting from its institutional law as patent law expert, the Federal Circuit seemingly adopted the Filmtec rule as one of patent assignment. But, as Professor Ted Hagelin pointed out in a 2013 article in the AIPLA Law Quarterly, the automatic assignment rule has no foundation in the Patent Act.  Section 261 speaks to writing requirements and priority rules arising from filing.  There is no mention of the magic word “hereby” as a marker between promises to assign in the future and present assignments of future interests.  Professor Hagelin recommended that Congress correct the error by amending Section 261.

But the Federal Circuit’s error is deeper than one of statutory misconstruction. Its decision confuses the relationship between patent law and contract law. The error is in the same category as the controversy over the conditional sale doctrine, a court created rule from Mallinckrodt v. Medipart, 976 F.2d 700 (Fed. Cir. 1992).  In Mallinckrodt, the Federal Circuit examined a patent owner’s power to impose conditions on its grant of rights to a licensee. Through announcing the conditional sale doctrine, the Federal Circuit ruled that a violation of such conditions constituted patent infringement rather than contract breach.  By so ruling, the Federal Circuit expanded its own jurisdiction by transforming questions of state contract law into those of patent law. A similar move occurs in Filmtec.

The usurpation of contract law by patent law is the subject of my 2014 article in the Journal of the Patent and Trademark Office Society.  My argument in that paper is grounded, in part, in Judge Pauline Newman’s criticism of Filmtec in her dissent from denial of en banc review in Abraxis v. Navinta. 672 F.2d 1239 (Fed. Cir. 2011). According to Justice Newman, patent assignments are a matter of contract law, which is in the jurisdiction of the states. Therefore, the Federal Circuit should look more closely at state law in deciding cases about patent assignments.

The judge’s point is particularly salient when one remembers that the Federal Circuit was created as an expert patent court.  It was given jurisdiction to hear some non-patent matters when these matters are related to patent cases.  Patent assignments are one obvious example of when the Federal Circuit has jurisdiction to consider state matters.  But, as Judge Newman points out, jurisdiction to hear a case does not mean authority to create new law, as the Federal Circuit arguably did in Filmtec and in Stanford. Instead, the Federal Circuit should look to other authorities to address non-patent law matters. For contract law matters, what state courts and legislatures have said about assignments generally would be relevant.  Furthermore, state law provides a stable and predictable source of authority for actors engaged in the business practice of negotiating patent assignments and other contracts.

The core problem is that the court has ignored the Erie doctrine. Under the Supreme Court’s 1937 decision in Erie v. Tompkins, a federal court ruling on a matter of state law under its diversity jurisdiction must apply the law of the state from which the dispute arose.  Which state law to apply is a matter of choice of law principles.  What the federal court cannot do is create its own federal common law in lieu of the state statutory or common law. As the Court affirmed in Butner v. United States, 440 U.S. 48 (1979),  the Erie doctrine applies to a court’s supplemental jurisdiction over state law claims attendant to a federal question. By creating its own federal common law of contracts, the Federal Circuit reveals a fundamental error in its understanding of the federal court system.

State law offers a different analysis of patent assignments from what the Federal Circuit adopts. Justice Breyer, in his Stanford dissent, cited a treatise on patent law by George Ticknor Curtis from 1873 that discusses patent assignments.  Curtis addresses how state law treats assignments and cites a Massachusetts case from 1841 dealing with patent assignments.  Relevant to the issues in Stanford, the assignment involved the present assignment of an invention that had not been made yet.  The court analyzed the assignment as it would any contract, identifying the terms of the document as a key to the expectations of the parties. State law precedents perhaps offer an alternative to the questionable Federal Circuit jurisprudence, at least with respect to patent assignments.

One related area in state law is that of security interests, a part of debtor-creditor law.  In entering into credit agreements, creditors ask for security in the form of collateral for a loan. The collateral may be a legal interest that is not in existence at the time of the loan.  An example would be the future sales or proceeds from a debtor’s business. Another example would be inventory remaining at the end of an accounting period.  These future interests are analogous to the future inventions or patents that I have been discussing.  Rights can be claimed in these properties that are nonexistent at the time of the contract formation between creditor and debtor.

Security interests provide the most common situation in which conflicting obligations arise.  Debtors often take multiple mortgages, hypothetic future proceeds to multiple creditors, and take multiple loans out on the same collateral.  As long as the value of the collateral can cover all the debts, then there is no problem in general.  However, if not all creditors can be satisfied, priority rules are necessary.  In the case of future interests, the law does not fall back on simple rules like first in time because there are multiple interests involved.  A creditor does not want to run the risk of not receiving any return on the debt.  The legal rules of priority allow the creditor to investigate the collateral and through such due diligence identify competing claimants on the collateral.  Priority rules, consequently, depend not only on the timing of the contract, but also on recording and notice requirements.

The case of conflicting patent assignments bears some similarity to the law on intangible future interests in creditor-debtor law.  Both entail rights in property that has yet to come into being.  The main lesson from creditor-debtor law, which is largely a matter of state law, is that many interests are implicated and therefore simple rules are not satisfactory.  The Federal Circuit has arguably adopted too simple and misguided a rule in the Filmtec.  The Supreme Court has confounded the error in the Stanford decision by ignoring the issue of automatic assignments. One way to correct course is by granting Shukh’s petition for certiori and restore the proper balance between federal patent law and state commercial law.

Charting Inventorship: Teams Get the Prize

Patent,

The primary goal of the patent system is to encourage innovation – “promote the Progress of Science and useful Arts.”  For me, the nature of inventorship is a fascinating pursuit: what are the factors that lead to invention and what are the results of invention?

A major shift over the past few decades in terms of inventors listed on U.S. patents is the rise of team-based inventorship. Back in 1975, the vast majority of U.S. patents were issued to a single inventor.  Since that time, there has been a steady trend toward more inventors-per-patent.  Around 1990 we reached a point where, for the first time, more than than half of US patents listed multiple inventors.  That trend toward more inventors per patents continues today.

Drilling down, the increase is seen in patents with three or more inventors.  The chart below shows the percentage of utility patents with either one listed inventor (downward sloping double line) or three+ listed inventors (upward sloping line).  The drop in the first almost exactly correlates with the rise in the second. Throughout this time, the percentage of two-inventor patents has remained steady at around 25%.

InventorsPerPatent

The chart does not offer any causation explanation.  Is the change is due to the nature of the inventions (i.e., more complex subject matter); the increase in team projects in corporate environment; or the politics of patenting (team projects more likely to get funded); or perhaps teams are better at identifying the valuable innovations; etc. We do know that multi-inventor patents tend to do better on patent scorecards and are more likely to be filed internationally, suggesting that their owners place more value on those patents.  In the U.S., un-assigned patents still tend to be single inventor. That factor may be explained by the reality that most cooperative inventorship endeavors set up a partnership or corporate to at least hold the patent rights.   Some areas of technology (esp: biotech & chemistry) tend to have more inventors-per-patent than the mechanical and software areas.

The chart below considers utility patents 2012-2016 and groups them according to the assignee country provided to the USPTO.  For each country, I looked at (1) the average number of inventors per patent; (2) the percentage of patents with 5+ inventors; and (3) the percentage of patents with only 1 inventor.   There is likely an interesting story to tell about Korea & India — why do they list so many inventors per patent?

AssigneeCountryInventors

 

 

USPTO: May 2016 Subject Matter Eligibility Updates

Patent

From the USPTO:

What the Defend Trade Secrets Act Means for Trade Secret Defendants

Patent,

Guest Post By Maxwell Goss. Dr. Goss is a business litigation attorney with McDonald Hopkins PLC in Bloomfield Hills, Michigan. His practice focuses on trade secret, noncompete, patent, trademark, and shareholder litigation.

The Defend Trade Secrets Act of 2016 (DTSA)—arguably the most sweeping change to the nation’s intellectual property laws in a generation or more—is about to become law. The bill recently passed both houses of Congress with overwhelming bipartisan support. President Obama is certain to sign the bill into law.

Much has already been written about the powerful new tools the DTSA gives to businesses looking to protect their trade secrets. Dennis Crouch, who has been covering the DTSA extensively, recently commented on those tools here, and I have written about them here. Most notably, the DTSA allows a trade secret owner to seek to have law enforcement officials seize property—without advance notice to the accused—to prevent dissemination of the trade secrets at issue.

But how do defendants fare under the DTSA? For example, suppose a business accuses its former employee of taking a confidential customer list or technical information when the employee left the company, and files suit under the DTSA. Or suppose another company hires someone accused of trade secret theft, and the person’s former employer sues the company for conspiracy under the DTSA. What does the DTSA mean for the accused?

Without a doubt, the DTSA gives some advantages to trade secret owners. But it also contains protections that defendants should take advantage of. These include a process for challenging an improper seizure of property, employment protections in the event of an injunction, and recovery of attorney’s fees for actions brought in bad faith. In the right circumstances, these provisions could give a trade secret defendant the upper hand.

Challenging an Improper Seizure

Under the DTSA, a person may have a laptop, server, storage device, papers, or other property forcibly taken into custody without advance notice. Litigants must keep in mind that this is an extraordinary remedy. Before seizure can be ordered, the applicant must show, among other things, that the accused person would evade an ordinary injunction and that the accused person would destroy or hide the property if given advance notice.

A key aspect of the DTSA for defendants is its requirement that a hearing be held within seven days of a seizure order, unless otherwise agreed by the parties. At the hearing, the trade secret owner will have to prove the facts and law necessary to support the order. This hearing can provide a chance for the defendant to set the tone of the case by attacking the trade secret owner’s position and possibly getting the seizure order dissolved. The DTSA also expressly permits modification of the usual time limits for discovery “to prevent the frustration of the purposes” of the seizure hearing. For the defendant who acts quickly, this may mean that expedited document production or even a helpful deposition could be obtained in advance of the seizure hearing.

Employment Protection

Injunctions sought in trade secret cases frequently involve restrictions on employment. For example, where a former employee is accused of misappropriating trade secrets, the former employer may try to obtain an order enjoining the person from disclosing the trade secrets to a competitor, using the trade secrets in service of a competitor, or even working for a competitor at all. Under the DTSA, an injunction to prevent actual or threatened misappropriation may not “prevent a person from entering into an employment relationship.” Moreover, any conditions that an injunction may place on a person’s employment may not be based “merely on information the person knows.” Instead, there must be evidence that the trade secret information at issue will actually be misappropriated. Counsel for the accused will of course seek to avoid any injunction. But where one is entered, counsel should ensure that these requirements are strictly followed.

Attorney’s Fees for Bad Faith

Finally, the DTSA provides that the accused may recover his or her reasonable attorney’s fees from the plaintiff if (among other things) the claim of misappropriation was made in bad faith. While existing state laws generally contain similar provisions, the DTSA is unique in adding expressly that bad faith “may be established by circumstantial evidence.” This is significant given that direct evidence of bad faith—say, an admission by the plaintiff that the claim was without merit—can be exceedingly difficult to obtain. One place to look for evidence of bad faith would be the affidavits submitted by the plaintiff in connection with an application for ex parte seizure.

In short, while the DTSA tightens the screws for those accused of trade secret misappropriation, it also contains important provisions allowing defendants to challenge improper claims and to limit their impact even where relief may be granted.

Right Sized Patents

Patent

Dennis Crouch

Many progressive policies focus on reducing disparities (income, wealth, education, and opportunities) that reflect some social injustice between those at the top and those at the bottom of our social spectrum. Conservatives often recognize the gaps but disagree about whether the result qualifies as injustice as well as about government’s role in redistribution.

Patent policy is often easier to implement than social policy (especially compared with other property law changes) because a new generation of patents emerges every twenty years and the old generation does not hang-around protecting and directing wealth but instead melds into the Soylent of the public domain.

In some ways though, patents are bucking the social trend and becoming more standardized and less diverse – at least by some outward measurements such as document size, claims per patent, and prosecution pendency.

Standard deviation is the most common measure of spread or dispersion of a statistic across a population. A population with a wider spread and more outliers will have a greater standard deviation.  For patent claims, this measure of spread has been dropping steadily for the past decade.  The first chart below shows the standard deviation of patent claim count for issued US utility patents grouped by year of issuance.

StdevClaimCountPatentlyo

The reduction in variance has been accompanied by a drop in the average number of claims per utility patent as shown in the next chart (note the axis break).

AvgClaimsPerPatent

My working hypothesis is that there are three primary drivers for the drop in claims-per-patent and all three also serve to (partially) explain the drop in spread.  These drivers: (1) a substantial increase in fees for filing more than 20 claims-per-patent that was put into place in 2004 and has continued to rise; (2) a suggested (but not confirmed) rise in restriction requirements for patents with more than 20 claims; and (3) a decrease in patent valuation leaving patentees less willing to support the higher cost of a large number of claims.  (As an aside, reasons (1) and (2) may also helping to dive the continued rise in re-filing.)

At the same time, however, another interesting trend is reducing the spread: there are fewer “small” patents with only 1-5 claims. Thus, the trend is a reduction of both small and mega patents (as measured by claim count) with a proportional increase in the middle with ‘average sized patents’.   The final chart below provides some further context to these statements.

PatentClaimCounts

The time series chart groups each year’s patents into a set of bands according to the number of issued claims.  As a savvy chart reader could surmise, the percentage of patents with 1-5 claims has dropped since 2002 as has the percentage of patents with >30 claims.  Those reductions were accompanied by a proportional rise in patents with 16-20 claims.  Time will tell whether this shift also leads to a more just society.

The Recent Federal Circuit Decision in Acorda Therapeutics v. Mylan Pharmaceuticals May Not be the Last Word on Personal Jurisdiction in ANDA Cases

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Guest Post By: Paul Dietze and Mini Kapoor, Haynes and Boone, LLP[1]

 On March 18, 2016, the Federal Circuit held that Mylan Pharmaceuticals, Inc. (“Mylan”), a generic drug manufacturer, was subject to specific personal jurisdiction in Delaware because Mylan had filed an abbreviated new drug application (“ANDA”) and “contemplate[d] plans to engage in marketing of the proposed generic drugs” in the state.[2]  The ruling affirmed two different decisions by judges in the United States District Court for the District of Delaware that Mylan was subject to specific jurisdiction in Delaware.[3]  However, as noted below, it looks like Mylan intends to seek panel or en banc rehearing and possibly pursue a petition for certiorari if the Federal Circuit does not grant the rehearing or re-hears the case and continues to find personal jurisdiction.

I. Procedural Posture of the Cases

Mylan filed two separate ANDAs with the U.S. Food & Drug Administration (“FDA”) seeking permission to market generic versions of unrelated pharmaceutical products marketed by Acorda Therapeutics, Inc. and AstraZeneca AB under the statutory scheme outlined in the Hatch-Waxman Act (the “Act”).  As permitted under the Act, Mylan certified that the patents of the brand name drug companies listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (“the Orange Book”) were either invalid or would not be infringed by Mylan’s marketing of its proposed generic versions of the drugs.  Each certification is deemed an artificial act of infringement under the Act, and permits the brand name drug companies to sue the generic drug company.  Acorda and AstraZeneca sued Mylan for patent infringement in separate lawsuits filed in Delaware.  Mylan moved to dismiss in both cases, arguing that it was not subject to either general or specific personal jurisdiction.[4]

Specifically, Mylan, citing the Supreme Court’s decision in Daimler AG v. Bauman,[5] argued that it was not subject to general jurisdiction in Delaware because it did not have contacts with Delaware that were so continuous “as to render it essentially at home in the forum state,” and was not subject to specific jurisdiction because it did not satisfy the minimum contacts requirement.[6]  Both district court decisions held that Mylan was subject to specific jurisdiction in Delaware.[7]  The district court decisions, however, differed as to whether or not Mylan was subject to general jurisdiction in Delaware.

II. The Opinion

On appeal, the majority opinion of the Federal Circuit panel affirmed specific jurisdiction without addressing general jurisdiction.[8]  The panel identified Mylan’s ANDA filings as “formal acts that reliably indicate plans to engage in marketing of the proposed generic drugs” and held the particular actions that “Mylan has already taken—its ANDA filings—for the purpose of engaging in that injury-causing and allegedly wrongful marketing conduct in Delaware” were sufficient to satisfy the minimum contacts requirement.[9] The court also identified the significant expense a generic drug company incurs in the ANDA application process as evidence of an ANDA-filer’s plans to market the drug.[10]  The court further noted that Mylan’s distribution channels in Delaware make clear that these future marketing activities would “unquestionably take place in Delaware (at least).”[11] The court concluded that the planned sales were “close enough” to the subject of the lawsuits to satisfy the minimum contacts requirement and justify specific jurisdiction in Delaware.[12]

Having found the minimum contacts requirement satisfied, the court considered whether Delaware’s exercise of jurisdiction would “offend traditional notions of fair play and substantial justice.”[13]  The court held that other considerations, such as those identified in Burger King Corp. v. Rudzewicz,[14] would not render jurisdiction unreasonable.

III. The Logical Implications

 By establishing specific personal jurisdiction by virtue of filing an ANDA with plans to direct sales of a generic drug into a particular state, a generic drug manufacturer, such as Mylan, would appear to be subject to specific jurisdiction in any state in which it intends to market the generic drug.  Almost always, this will be any state in the country.

Prior to the Supreme Court’s ruling in Daimler, branded-drug companies often asserted jurisdiction in a state based on general jurisdiction, arguing that the generic company was subject to jurisdiction in the state because it intended to sell the generic version of the drug in the state.  In Daimler, however, the Supreme Court held that general jurisdiction cannot attach unless the defendant’s contacts with the forum state are “so continuous and systematic as to render [the non-resident corporate defendant] essentially at home in the forum State.”[15] A corporation is essentially at home only in its state of incorporation and the state where its principal place of business is located.[16] Daimler specifically rejected the notion that general jurisdiction will lie “in every State in which a corporation engages in a substantial, continuous, and systematic course of business.”[17] This decision in Daimler raised the concern as to whether brand name drug companies could continue to rely on general jurisdiction to file suits in the forum of their choice.  However, the court’s ruling in Acorda, by establishing specific jurisdiction based on filing an ANDA with plans to sell the drug in a state, arguably makes the high bar for general jurisdiction established in Daimler of little significance in ANDA cases.

Thus, under Acorda, brand name drug companies are likely to continue to have wide latitude in selecting the forum in which to sue an ANDA-filer.  Delaware and New Jersey, where ANDA cases are often brought, are likely to continue to be forums of choice for ANDA cases.

IV. Expected Future Litigation

 Letters filed by Mylan in pending district court actions indicate that Mylan plans to seek panel and en banc rehearing in Acorda.[18]  The letters provide a preview of Mylan’s potential arguments for rehearing.  Mylan is expected to argue that Acorda’s holding that Mylan is subject to specific jurisdiction in every state “is contrary to the basic notion of specific jurisdiction and the more basic constitutional guarantees at the heart of the Supreme Court’s due process/personal jurisdiction jurisprudence.”[19]  Mylan is further expected to argue that Acorda was wrongly decided because it “simply recreates the pre-Daimler status quo by allowing courts throughout the nation to rely on specific jurisdiction where general jurisdiction is no longer applicable.”[20]  Mylan also indicates that it will argue that Acorda’s reliance on Mylan’s future contacts in Delaware is contrary to the Supreme Court’s Walden v. Fiore decision[21] and that the present decisions are misplaced in view of prior Federal Circuit precedent in Zeneca Ltd. v. Mylan Pharm., Inc.,[22] where the Federal Circuit “held that submission of an ANDA to the FDA in Maryland did not authorize the exercise of jurisdiction over the ANDA-filer by Maryland federal courts.”[23]  Acorda, Mylan argues, makes “Zeneca merely academic.”

Regardless of the Federal Circuit’s final ruling, the losing party may very well file a petition for certiorari with the Supreme Court seeking review of the Federal Circuit’s decision.  That Acorda and Mylan were represented at the Federal Circuit by former Solicitor Generals (Theodore Olson for Acorda and Paul Clement for Mylan), while AstraZeneca was represented by another Supreme Court veteran (Kannon Shanmugam), shows that each party considers this case to be important and that they are likely preparing to ask the Supreme Court to consider the matter.  So the panel decision in Acorda appears to be merely the beginning of the appellate proceedings.  Given these expected actions it will be interesting to see if the brand name drug companies continue to file suits in both the brand name drug company’s preferred jurisdiction as well as where the generic drug company is incorporated or has its principal place of business until all the Acorda appellate proceedings are concluded.

= = = = =

[1] Paul E. Dietze, Ph.D., is Of Counsel in the Washington, DC office and Mini Kapoor, Ph.D., is an associate in the Houston, Texas office of the law firm of Haynes and Boone, LLP.  Their practices emphasize pharmaceutical patent counseling, patent procurement, and patent litigation.

[2] Acorda Therapeutics Inc. et al. v. Mylan Pharm. Inc., No. 2015-1456 and AstraZeneca AB v. Mylan Pharm. Inc., No. 2015-1460, 2016 WL 1077048 (Fed. Cir. March 18, 2016) [Patently-O Discussion].

[3] Acorda Therapeutics Inc. & Alkermes Pharma Ireland Ltd. v. Mylan Pharm. Inc. & Mylan Inc., 78 F. Supp. 3d 572 (D. Del. 2015) (Stark, C.J.); AstraZeneca AB v. Mylan Pharm. Inc., 72 F. Supp. 3d 549 (D. Del. 2014) (Sleet, J.).

[4] Acorda, No. 1:14-cv-00935, 2014 WL 8772659  (Defs.’ Br. Supp. Mot. Dismiss) (Aug. 27, 2014);  AstraZeneca, No. 14-696, 2014 WL 4745288  (Defs.’ Br. Supp. Mot. Dismiss) (June 26, 2014).

[5] 134 S. Ct. 746 (2014).

[6] Acorda, No. 1:14-cv-00935, 2014 WL 8772659 (Defs.’ Br. Supp. Mot. Dismiss 3, 6) (Aug. 27, 2014); AstraZeneca, No. 1:14-00696, 2014 WL 4745288  (Defs.’ Br. Supp. Mot. Dismiss 5, 13) (June 26, 2014).

[7] Acorda, 78 F. Supp. 3d at 597; AstraZeneca, 72 F. Supp. 3d at 560.

[8] Judge O’Malley opined that by virtue of voluntarily electing to do business in Delaware, and registering and selecting an agent for service of process in the state, Mylan was subject to general jurisdiction in Delaware.  Acorda, Nos. 2015-1456 & 2015-1460, 2016 WL 1077048 at *11 – *12 (Judge O’Malley concurring).

[9] Acorda, Nos. 2015-1456 & 2015-1460, 2016 WL 1077048  at *8 -*9.

[10] Id. at *11 – *12.

[11] Id. at *13.

[12] Id.

[13] Id. at *13 -*14 (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).

[14] 471 U.S. 462, 477 (1985).

[15] Daimler, 134 S. Ct at 758 n.11 (emphasis added).

[16] Id. at 760.

[17] Id. at 760-61 (internal quotations omitted).

[18] See, for example, Takeda GmbH, et al., v. Mylan Pharm. Inc., 1:15-cv-00093 (N.D. W. Va.) (Defs.’ Letter Status Rep.) (Mar. 25, 2016).

[19] Id.

[20] Id.

[21] 134 S. Ct. 1115 (2014).

[22] Takeda GmbH, et al., v. Mylan Pharm. Inc., 1:15-cv-00093 (N.D. W. Va.) (Defs.’ Letter Status Rep.) (Mar. 25, 2016).

[23] 173 F.3d 829 (Fed. Cir. 1999).

Guest Post: The AIA, Inter Partes Review, and Takings Law

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In a provocative new article called “Taking Patents,” 72 Wash & Lee L. Rev. (forthcoming 2016), Gregory Dolin (Baltimore) and Irina Manta (Hofstra) argue that the Federal Government effectuated a taking through its creation and implementation of the inter partes review mechanism.  Below, Camilla Hrdy and Ben Picozzi summarize the main points of their recent response to Dolin and Manta, “The AIA Is Not a Taking: A Response to Dolin & Manta,” 72 Wash. & Lee L. Rev. Online 472 (2016).

Gregory Dolin and Irina Manta argue in a forthcoming article that the Leahy-Smith America Invents Act (AIA) effectuated a Fifth Amendment “taking” by enhancing the mechanisms for challenging issued patents in administrative proceedings. Initial data do indicate that patents are more likely to be found invalid in the new inter partes review (IPR) and covered business method review (CBMR) proceedings than in district court actions or through the IPR and CBMR’s administrative predecessors. Patentees’ have even complained that the filing of individual IPR petitions has affected their stock prices.

Has the AIA made it too easy to invalidate a patent? Have patentees been treated unfairly? Maybe. Maybe not. But one things is clear: Dolin and Manta’s argument that the AIA is a taking faces serious legal hurdles.

First, Dolin and Manta’s premise that patents are property rights protected by the Takings Clause is far less clear than they contend. While the Supreme Court has recently suggested that patents, like land, “cannot be appropriated or used by the government itself, without just compensation,” see Horne v. Department of Agriculture, 135 S. Ct. 2419 (2015) (quoting James v. Campbell, 104 U.S. 356, 358 (1882)), both that statement, and the statement it quotes, are dicta. More recent decisions express greater ambivalence regarding patents’ status under the Takings Clause.

In contrast with trade secrets, the Supreme Court has never held that patents are property under the Takings Clause. In Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 (1999), the Court held that Congress can’t abrogate states’ sovereign immunity from patent infringement claims. In reaching this conclusion, the Court stated that patents are “surely included within the ‘property’ of which no person may be deprived by a State without due process of law.” Id. at 642. But the Court declined to rule on patents’ status under the Takings Clause. See id. at 642.

Most recently, in Zoltek Corp. v. United States, 442 F.3d 1345 (Fed. Cir. 2006) (per curiam), vacated on other grounds, 672 F.3d 1309, 1314–22 (Fed. Cir. 2012) (en banc), the Federal Circuit held (rightly or wrongly) that 28 U.S.C. § 1498 is the only means of recovery for patentees whose patents are infringed by the U.S. government. Patentees can’t bring claims for compensation under the Takings Clause. Although the court eventually vacated that decision, the court never repudiated the reasoning behind its constitutional holding.

Dolin and Manta try to get around Zoltek by arguing that, unlike government infringement—which is like a forced permit and leaves all the rights of a patent intact—the AIA “changed the scope of patent rights themselves” by subjecting issued patents to more stringent post-issuance review. However, courts have not endorsed that argument, and analogs are difficult to find.

Second, even if we accept the argument that government can potentially take patents by altering their scope retroactively, courts are unlikely to view post-issuance review proceedings as the kinds of government actions regulated by the Takings Clause. Courts assessing constitutional challenges under the Fifth or Fourteenth Amendment tend to distinguish actions intended to “cure” defects in government administrative systems from incursions on property rights. In Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed. Cir. 1985), the Federal Circuit rejected a very similar challenge to IPR’s predecessor based partly on this distinction, noting that reexamination statute belonged to “the class of ‘curative’ statutes, designed to cure defects in an administrative system[,]” and that such statutes are treated more favorably for Fifth Amendment purposes even when they devalue property rights. We see little reason that a court would reach a different conclusion today.

Lastly, even if a court decides it is possible for the government to take patents by subjecting them to more stringent post-issuance review, Dolin and Manta’s argument almost certainly loses as a matter of takings doctrine. To determine whether a particular governmental action effectuates a taking, courts assess “the character of the governmental action, its economic impact, and its interference with reasonable investment-backed expectations.” See Penn. Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978). Thus, even assuming we accept that the AIA significantly devalued all patents (a big “if”), whether this constitutes a taking depends on whether patentees should have anticipated that Congress would amp up administrative review, given the existing regulatory background.

Dolin and Manta argue the AIA’s enhanced IPR and CBMR proceedings interfered with patentees’ “reasonable investment-backed expectations” by increasing the likelihood that their patents would be found invalid in administrative proceedings utilizing patentee-unfriendly rules such as “preponderance of the evidence” standard for invalidation and “broadest reasonable construction” with limited opportunity to amend. But, as Dolin and Manta concede, the AIA was enacted against a background of federal statutes and regulations that authorize challenges to patent validity. IPR and CBMR review are only the latest in a series of administrative procedures authorizing parties to offensively challenge the validity of issued patents. To us, it seems highly unlikely that the question of whether the Takings Clause applies to the creation of new IPR and CBMR review could turn on such small differences as whether or not patentees have a full opportunity to amend their claims during review.

Also, it is worth noting that beyond third party challenges to patent validity, numerous federal regulatory statutes limit patentees’ ability to exploit their inventions for purposes of health and safety. For example, various regulatory review statutes, such as the Food, Drug, and Cosmetic Act (FDCA), the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), and the Toxic Substances Control Act (TSCA), practically reduce effective patent lifetimes by prohibiting patentees from commercially marketing or using protected products prior to regulatory approval. Yet none of these statutes fully compensate patentees for their losses.

Are these actions all takings as well? This conclusion has troubling consequences. Does Congress really need to compensate patentees every time it passes a statute that significantly affects the value of issued patents? Could Congress pass regulations for the purpose of restraining bad-faith enforcement of patents that have already been granted? What about judicial actions that reduce the value of patents? Do they intend for Congress to compensate patentees in these cases or to take fewer actions limiting patent rights, simply due to the fear of effectuating a taking? This seems like a dangerous basis on which to formulate patent policy.

In any case, we think that, given this regulatory backdrop and the existence of administrative review proceedings for over thirty years, patentees could foresee—or reasonably should have foreseen—that the government would continue to actively regulate patent rights without “just compensation.”

Together, these arguments persuade us that the AIA is not a taking. Nevertheless, the authors’ article is a thought-provoking and educational analysis of the constitutional implications of Congress’s recent efforts to reform the patent system. We thank them for reopening the door on this area of scholarship.

Rights of Trade Secret Owners in Federal Cases

Patent,

by Dennis Crouch

By longstanding tradition, US courts are open, transparent in proceedings, and transparent in judgment.  The FISA courts that I cover in my internet law course are so controversial because they are so contrary to that tradition.  Courts are also sensitive to the disclosure of trade secrets and, in the past, have liberally allowed parties to file documents under seal to avoid destroying those rights.  Most recently, for instance, the Supreme Court permitted Shukh to file redacted public briefs to avoid discussing secret information regarding his invention rights. See Supreme Court Rule 5.2.

The Defend Trade Secrets Act (DTSA) includes an new provision added to the Economic Espionage Act (EEA) that, depending upon how it is interpreted, may govern how district courts handle trade secret information in all cases. The new section will be codified as 18 U.S.C. 1835(b) and reads:

(b) Rights Of Trade Secret Owners.—The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential. . . .

Courts already liberally allow parties to file documents under seal – so that doesn’t provide the entire impact of the provision.  Rather, the provision’s importance is that it extends beyond briefs being filed by parties and instead reaches disclosures at trial and court opinions.   Thus, the statute presumably prevents a court from disclosing a trade-secret in its opinion without first providing the trade-secret owner with the opportunity to brief the issue of disclosure.  In addition, it provides non-parties with a right to request (under seal) non-disclosure of their trade secret rights.

Unlike other provisions in EEA/DTSA, this “right” is not expressly limited to actions arising from the EEA/DTSA. Rather, it may be read broadly as a provision providing procedural rights of trade secret owners in all federal cases.  If so, it will effectively serve as a form of trade secret privilege and will end-up being the most cited aspect of the new law.

The DTSA was presented to President Obama for his signature on April 29, 2016 and should become law within the week.

Pending Supreme Court Patent Cases 2016 (May 3 Update)

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by Dennis Crouch

Laches: The Supreme Court granted SCA’s writ of certiorari on the question of whether laches defense applies to block back-damages in patent cases. The Federal Circuit says “yes” while the Supreme Court recently said “no” in a parallel copyright case (Patrella).  The Supreme Court decided Patrella 6-3 with Justice Scalia in the majority offering the potential of a tight-split in this case.  The court looks to be sitting-on the parallel case of Medinol v. Cordis until SCA is decided.

CheerCopyrightCopyright on Useful Articles: Although not a patent case, the court also decided to hear a “useful article” copyright case.  Star Athletica v. Varsity Brands.  The case asks whether the stripes and chevrons found in a cheerleader uniform are sufficiently “separable” from the uniform in order to be copyrightable.  The useful article doctrine is generally considered to be setting up a boundary line between the domains of copyright and patent.

More Challenges to USPTO Authority: MCM filed its petition for writ of certiorari directly challenging USPTO authority to conduct inter partes review proceedings with two easy questions:

  1. Does IPR violate Article III of the Constitution?
  2. Does IPR violate the Seventh Amendment to the Constitution?

[MCM Petition and Appendix] MCM’s brief was filed Tom Goldstein along with Ned Heller.  The question for the Supreme Court is whether to extend or contract from its position in Stern v. Marshall, 131 S. Ct. 2594 (2011) where the court held that Article III of the U.S. Constitution prohibits Congress from withdrawing “from judicial
cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” Quoting Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272  (1856)).

The brief raises a set of interesting old cases focusing both on the separation of powers and the tradition that patent-revocation for invalidity requires a jury to decide disputed facts.

  • Ex Parte Wood & Brundage, 22 U.S. 603 (1824)
  • McCormick Harvesting Mach. Co. v. C. Aultman & Co., 169 U.S. 606 (1898)
  • Mowry v. Whitney, 81 U.S. 434 (1871)
  • Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272 (1856)
  • Neilson v. Harford, Webster’s Patent Cases 295 (1841)
  • Pennock v. Dialogue, 27 U.S. 1 (1829)
  • United States v. Am. Bell Tel. Co., 128 U.S. 315 (1888)

Cooper v. Lee raises some parallel issues. Its petition will be considered by the Court in its May 12. [Update: The court has “rescheduled” consideration of Cooper’s brief – perhaps awaiting its own determination in Cuozzo.]

Hereby Assign Future Inventions: In Shukh v. Seagate, the petitioner raises the long-brewing question involving the Federal Circuit’s interpretation of patent assignments.  In particular, the Federal Circuit has ruled – as a matter of federal patent law – that patent rights are assignable before their invention is even contemplated. The petition asks:

[W]hether FilmTec’s “automatic assignment” rule should be overruled because it extinguishes inventors’ constitutional and statutory rights to inventorship and ownership.

In Stanford v. Roche, Justices Breyer, Ginsburg and Sotomayor criticized the Federal Circuit’s rule and suggested that the issue should be presented in a future case. The majority expressly noted that its opinion did not decide the issue. [Shukh v. Seagate – Redacted Public Petition]

Disparaging Trademarks: A pair of disparaging trademark cases have also been petitioned: Lee v. Tam (“Slants”) and  Pro-Football v. Blackhorse (“Redskins”).   The Federal Circuit previously held the limit on registering disparaging marks to be an unconstitutional abrogation of the freedom of speech.

The big list: (more…)

Supreme Court to Review (and likely Reject) Laches as a Defense in Patent Infringement Cases

Patent, ,

by Dennis Crouch

The Supreme Court has granted SCA Hygeine’s petition for writ of certiorari with merits briefing over the summer and a likely fall 2016 hearing on the question:

Whether and to what extent the defense of laches may bar a claim for patent infringement brought within the Patent Act’s six-year statutory limitations period, 35 U.S.C. § 286.

SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, Supreme Court Docket No. 15-927 (2016).  This case is another patent-copyright parallel and follows the Supreme Court’s 2014 copyright laches case in Petrella v. Metro-Goldwyn-Mayer, 134 S. Ct. 1962 (2014).  In Petrella, the Supreme Court held that laches cannot be used to further shorten the three-year copyright limitations period set forth in 17 U.S.C. § 507(b).  Following Petrella, however, the Federal Circuit rejected the copyright parallels and instead embraced patent law exceptionalism — holding en banc that laches remained a viable defense and can bar infringement claims accruing within the six-year limitations period of 35 U.S.C. § 286. (6-5 holding).

In both patent and copyright cases the issue of laches arises more often than you might think because of the legal treatment of “ongoing” infringement.   Each infringing act is seen as a new act of infringement.  Thus, the six-year limits period starts anew each time a new copy of the infringing product is made, sold, or used.  If someone has been making an infringing product for the past 10 years, the statute would let the patentee them reach back 6 years for damages. Courts often see that result as as problematic when the patentee sits on its rights for so long (and since most civil claims have a shorter period of limitations) and thus apply the laches doctrine to limit collection of back damages even when within the six-year period.

Look for the court to reverse the Federal Circuit’s ruling based upon the historic interplay between equity and law.  As in Petrella, I expect that the court will base its decision on the rule that that laches is a defense to equitable relief but does not limit the recovery of legal damages.  Although Petrella was 6-3, I expect that the dissenters will see the value in linking patent and copyright regimes.

= = = = =

The court also granted certiorari in Star Athletica v. Varsity Brands – that case focuses on the functionality doctrine in copyright law.  In particular focusing on copyrightability of the stripes and chevrons integrated into cheerleader uniforms. Question presented: What is the appropriate test to determine when a feature of a useful article is protectable under § 101 of the Copyright Act?

The petition outlines the ten-different-tests that folks use to determine whether the work of authorship is capable of being “identified separately from, and … existing independently of, the utilitarian aspects of the article.”

 

Patentlyo Bits and Bytes by Anthony McCain

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 Get a Job doing Patent Law                  

Federal Circuit Continues Broad Venue Allowance in Patent Cases

Patent, ,

by Dennis Crouch

In its petition for writ of mandamus, TC Heartland raised a set of interesting venue and personal jurisdiction claims – basically arguing that both the statute and Supreme Court precedent strongly limit where patent claims can be brought.

In its new decision, however, the Federal Circuit panel has rejected the petition – finding that “Heartland’s arguments are foreclosed by our longstanding precedent.”  This result was expected – likely even by Heartland’s counsel Prof John Duffy and Jim Dabney – and the long game has seemingly always been focused on en banc review and a potential supreme court review.  An eventual win by Heartland would result in a major shake-up of patent litigation by greatly reducing the concentration of patent cases – especially those in the Eastern District of Texas.

The basic setup:

Heartland alleged that it is not registered to do business in Delaware, has no local presence in Delaware, has not entered into any supply contracts in Delaware or called on any accounts there to solicit sales. But Heartland admitted it ships orders of the accused products into Delaware pursuant to contracts with two national accounts.

Based upon this setup, Heartland argues (1) that it does not “reside” in Delaware for venue purposes according to 28 U.S.C. § 1400(b); and (2) that Delaware district court lacks specific personal jurisdiction over it for this civil action.

Unfortunately for Heartland, these same arguments were raised and resolved by VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).  Although Heartland presented an argument that an amendment to the statute overruled VE Holdings, that argument was flimsy and rightly rejected by the appellate panel.  Rather, the real argument – now to be presented en banc – is that VE Holdings was wrongly decided and represents a misinterpretation of both the statute and Supreme Court precedent.

I previously explained the primary argument as follows:

In the dispute, Heartland has asked the court to reconsider its interpretation of the patent venue statute 28 U.S.C. § 1400(b) and order that the limiting elements of the provision be given effect.  Under the proposed interpretation, a patent infringement case could only be filed in districts either (1) the defendant resides or (2) the defendant has both committed acts of infringement and has a regular and established place of business. This proposal stems directly from the language of 28 U.S.C. § 1400(b) which requires either (1) residency or (2)  a combination of infringing acts plus a regular-place-of-business as a prerequisite to proper patent venue. For the past several decades the limits of § 1400(b) have been given essentially no weight after being undermined by 28 U.S.C. § 1391(c). This broadened provision undermines § 1400(b) by providing a very broad definition of the term “resides” — indicating that that “except as otherwise provided by law,” a defendant will be deemed to “reside” in any venue where the defendant is subject to that court’s personal jurisdiction in the action at hand. When § 1400(b) and § 1391(c) are read together, it appears that patent cases can be filed in any venue with personal jurisdiction over the defendant.  The point of the TC Heartland mandamus action is that those two provisions should not be read together, but instead, the more traditional and limited definition of “residency” should apply when interpreting 1400(b).

On TC Heartland’s side is Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957).  In that case, the Supreme Court ruled that “28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).”  This statement was reiterated by the Supreme Court in Brunette Mach. Works Ltd. v. Kockum Indus., Inc., 406 U.S. 706 (1972) (“Congress placed patent infringement cases in a class by them-selves, outside the scope of general venue legislation.”).  Congress then amended the statute which led the Federal Circuit to hold that Fourco no longer held sway.

 

 

 

Patent Quality Symposium Report – USPTO Patent Quality Initiative Moving Forward

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Guest Post by Professors Colleen Chien, Santa Clara University Law School and Arti Rai, Duke Law School

On Wednesday, April 27, 2016, the USPTO hosted a day-long conference around the one-year anniversary of its Enhanced Patent Quality Initiative. We were among the over 1,800 virtual attendees (in addition to over 400 participants at USPTO headquarters and in the satellite offices) and provide this brief summary of some of the highlights. A recording of the day is available here, and information on the launch of the Office’s Stakeholder Training on Examination Practice and Procedure (STEPP) program is here. The USPTO’s current request for comments on patent quality metrics, including the Master Review Form (MRF), is due May 24. Santa Clara Law research assistant Angela Habbibi is pulling together a summary of the USPTO’s request for comments on quality case studies here, and the hardworking students of the Berkeley Technology Law Journal have done the same, with respect to comments submitted to the USPTO from last year, here, and comments submitted to the Journal here.

USPTO Director Michelle Lee and Deputy Commissioner for Patent Quality Valencia Martin-Wallace opened the day by highlighting four inter-related components: 1) the clarity of the record pilot; 2) new quality metrics, as embodied in a new Master Review Form; 3) using post-grant outcomes to improve patent examination; and 4) improved prior art search, so as to accomplish “compact prosecution.”  Subsequent speakers discussed each of these components in detail, generally with a focus on one or more of the following themes – clarity, consistency, accountability, and collaboration.

Clarity of Record Pilot

Robin Evans, Director of TC 2800, focused on the clarity of the record pilot, which started in March and will run for 6 months. The pilot includes approximately 130 randomly selected examiner participants, (all GS 11-15 with at least years of 2 years of experience) and 45 SPEs.  The USPTO anticipates processing about 2000 applications through the pilot.

Examiners in the pilot will focus on enhancing documentation of claim interpretation (including functional/112(f) language), giving more precise reasons for allowance, doing pre-search interviews at the request of the examiner, and giving more detailed interview summaries.  Examiners are also supposed to document the amount of time they spend improving clarity. Examination conducted in the pilot will be compared with that conducted by a control group composed of similar examiners.

Master Review Form, Consistency, and Data Collection and Analysis

According to Director Lee and Brian Hanlon, the Director of the Office of Patent Legal Administration, the pilot’s emphasis on record clarity is also embodied in the new 25-page Master Review Form for quality, which places equal weight on clarity and correctness.  As Marty Rater, Chief Statistician of the Office of Patent Quality Assurance explained in the afternoon, the MRF is the Office’s response to a general perception that the quality composite that the Office has long relied upon needed to be replaced.  While not all 25-pages would be used for any one application, having a single uniform form will enable previously siloed reviews, carried on (for example) at the TC, OPQA, and other levels, to draw from a common core of data and improve consistency across the agency. Stakeholders in the afternoon session provided feedback on how the MRF could be made clearer and shorter, so as to facilitate consistent reviews.

A look at the 135 quality case study topics submitted for consideration to the USPTO in response to a recent request highlights that consistency in the application of Sections 101, 103, and 112 is perhaps the greatest concern. Consistency has ramifications for compact prosecution and continuation practice as well. If an applicant is confident that her applications are consistently subjected to high-quality examination, she may find it easier to appeal or abandon on the basis of a final rejection, rather than continuing the case in hopes of a different outcome from a different examiner on the same patent application.

In line with the case study suggestions, the USPTO aims to address concerns about particular types of examiner rejections and consistency across technology groups within the patent corps. To that end, it will be conducting studies on the use of section 101 and 112(f) by examiners; on the correctness and clarity of motivation statements in obviousness rejections based on combining references; and enforcement of written description requirements in continuation applications.

The release by the Patent Office of large amounts of data in accordance with the Obama Administration’s decision to treat government data as a national asset of the American people has led to the burgeoning of patent data companies and innovation, with at least 135 companies relying on patent data, according to a count by one of us. But a question regarding data analysis by external sources prompted Valencia Martin-Wallace to note that these external sources produced results that didn’t always match the USPTO’s own analyses.  Deputy Director Russ Slifer elaborated on this theme by noting that the USPTO wanted to be part of the community dialogue on data analysis and had recently put out a large amount of publicly available, freely analyzable data at https://developer.uspto.gov.

Use of Post-Grant Outcomes

Jack Harvey, the Acting Assistant Deputy Commissioner for Patent Operations, discussed several objectives with respect to a just-initiated pilot, expected to last 3-4 months, that will use of post-grant outcomes to enhance quality.  First, in cases where patents petitioned before the PTAB have related applications pending, the examiner on the related applications will receive the petition. Second, and more broadly, data collected from post-grant proceedings will be used to improve examiner search strategy, both at the level of the individual examiner and also across the corps. It’s our understanding that such “feedback loops” have also been a feature of EPO practice: in which nullity proceedings involve the original patent examining team that granted the patent, which can then learn from the post-grant proceedings.

Improved Search and Training

According to Maria Holtmann, Director of International Programs, the goal of improved search will also be pursued through a pilot, to be begun later this year, that will “jumpstart” search by providing automated pre-examination search results.  Ongoing pilots are currently providing examiners with JPO and KIPO search reports prior to the first office action.  And the Global Dossier now provides examiners and the public with “one-stop access” to dossiers of all related applications in the IP5.

We were happy to hear that access to comprehensive prior art sources – including non-patent sources – earlier in the examination process is seen as a major patent quality lever. Work by one of us suggests that European Patent Office search reports cite non-patent literature sources more than USPTO examiners rely upon on them in their own examination, but a number of existing and future initiatives could close this gap. As Donald Hajec, Assistant Deputy Commissioner for Patent Operations, described, the USPTO  is promoting greater awareness of non-patent technical sources, through the STIC, crowdsourcing of NPL, and technical training by outside scientists through the PETTP program, for example. And in line with numerous commentators who have emphasized the importance of Section 112 in policing quality, Hajec stressed the extensive training examiners, particularly those in electrical/mechanical and computer/software art units, have received on Section 112(a) (written description and enablement), 112(b) definiteness, and 112(f).

Collaboration

During the last set of panels, moderated by Deputy Director Russ Slifer, participants from companies and law firms acknowledged the responsibility for patent quality that stakeholders share with the USPTO. The participants on the panel provided their sense of 1) what initiatives of the USPTO initiatives are working for stakeholders and what needs improvement, 2)  the wide variability in the business uses of patents based on company size and industry, and 3) what stakeholders could do, on their own or in conjunction with Examiners, to improve the quality of submitted applications and patent prosecution.

In particular, props were given to Track One, which Bill Bunker of Knobbe commented that certain clients (not small entities) use exclusively, with a much more efficient outcome. He also described the First Action Interview Program as a good early opportunity to achieve a meeting of the minds. Other panelists applauded the USPTO for focusing on patent quality, a topic that they thought had significant economic consequences and was imperative to the functioning and perception of the patent system. However, Laura Sheridan of Google observed that the voluntary nature of certain initiatives like the glossary pilot program limited their impact, and that mandatory enforcement would likely be more effective at raising quality uniformly across applications.

An interesting question is whether or not all patents “need” to be of the highest quality, given the diverse business uses of patents by different types of companies and industries. SAS files patents primarily for defensive reasons, commented Tim Wilson, and needs to have reliable patents for negotiations. In contrast, according to Bill Nydegger of Workman Nydeggerr commented, startups are often just trying to validate their technology and get an issued patent, rather than thinking about it being tested in court or negotiations. Biopharma patents often prove their value in the last five years of a patent’s life, with written description and utility requirements providing the most important filters, Kevin Noonan of MBHB commented.

For both the USPTO and prosecutors, the challenge of increasing quality in the face of flat budgets and price pressure is quite real, although perhaps less of an issue in the biopharma sector. In that vein, several ways to do more with less were discussed. In response to a question from Deputy Director Slifer, panelists discussed how they could continue to ensure that patent prosecutors were actually pursuing a strategy that serves the business use – whether that be to cover one’s own product or that of a competitor. Although getting an issued patent is often the goal of the prosecutor, if its scope is diminished to such a degree that it doesn’t make business sense, cutting off prosecution earlier may be the right approach. In addition, greater collaboration between examiners and applicants earlier in the process could streamline the process. Examiners would probably appreciate applicant summaries of the subject matter. Though applicants are loath to put material into the record, examiners could perhaps get a demonstration of the technology before examination and search began, enabling a substantive discussion of the prior art early in the process.

One question that deserves more attention, in our opinion, is whether the USPTO could provide “model applications” or patents to facilitate  public understanding of what a “quality” application looks like from the standpoint of the USPTO. Shared responsibility comes from shared understanding. The newly devised STEPP program, to educate law-firm and in-house practitioners on how Patent Examiners review applications, starting in July, as well as the Symposium overall, are important steps in achieving shared understanding, and we join the patent community in applauding USPTO efforts.

To further these efforts, our institutions, Santa Clara and Duke Law Schools, will be hosting two conferences on USPTO initiatives and other levers for improving patent quality later this year.  The conferences will be held in Santa Clara and also in the DC area and will focus on empirical evaluation of patent quality levers.  We will provide more information on these forthcoming conferences shortly.

DTSA as a Shoe Horn for Contract and Employment Law Claims

Patent,

I expect that an important result of the Defend Trade Secrets Act (DTSA) will be the creation of supplemental federal jurisdiction over contract and employment disputes that are otherwise a matter of state law decided by state courts.  The majority of trade secret lawsuits also involve breach of contract and/or employment law claims – with the breach serving as the requisite ‘improper means,’

The DTSA provides federal district courts with original jurisdiction of the new federal claim of trade secret misappropriation.  Once a federal cause of action is established, the court will also “have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a).   Where, as above, the breach of contract or employment duty wrapped into the factual tale of trade secret misappropriation then a court would likely find the supplemental jurisdiction requirements met.   The statute goes on to give district courts deference to “decline to exercise supplemental jurisdiction” in certain situation.  28 U.S.C. § 1367(c).

As we move toward more contract cases in Federal Courts, it will be interesting to see the extent that large corporations next push for federalizing of contract law.

 

Implementing and Interpreting the Defend Trade Secrets Act

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By Dennis Crouch

With today’s 410-2 House vote, the Defend Trade Secrets Act (DTSA) has now passed both the House and Senate and is headed to President Obama for his expected signature.[1]  The DTSA amends the Economic Espionage Act to create a private civil cause of action for trade secret misappropriation based upon the Congressional sense that trade secret theft exists and is harmful.[2]  Trade secret misappropriation (as a civil matter) has previously been purely a matter of state law.  Although there is substantial uniformity between the states,[3] there are also a number of differences and perceived procedural weaknesses.[4]  The DTSA would not eliminate or preempt the various state trade secret rights but rather would operate as an additional layer of potential protection.[5] The law is designed to go into effect on its day of enactment and apply to any misappropriation that occurs on or after that date.

On March 10, 2017, the University of Missouri’s Center for Intellectual Property and Entrepreneurship (CIPE) along with our new Business, Entrepreneurship, and Tax Law Review (BETR) will host a symposium on Implementing and Interpreting the Defend Trade Secrets Act.  I expect that we will live-stream the event and will also publish speaker articles in BETR.  There is a lot to figure out. Contact me if you are interested in sponsorship opportunities (dcrouch@patentlyo.com).

The central provision of the DTSA will be codified as 18 U.S.C. § 1836(b) and reads:

An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.

Defining Trade Secret: The DTSA broadly defines the term “trade secret” to mean “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.”  Although this definition is broad and certainly includes abstract ideas and laws of nature, it might not encompass information that is only stored in the human mind.[6]

Defining Misappropriation of a Trade Secret:  The statute also defines “misappropriation” in detail.  My rough approximation is as follows: without permission (A) obtaining a trade secret that was knowingly obtained through improper means or (B) disclosing or using a trade secret without knowing either (1) that it is a trade secret or (2) that it was obtained through improper means.  These “improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” However, misappropriation does not include “reverse engineering, independent derivation, or any other lawful means of acquisition.”  The DTSA does not otherwise include a more general fair-use or news-reporting exception.  However, the First Amendment will certainly serve as a backstop.  Further, these definitions do not include any express territorial limit – it will be very interesting to see the extent that these limits will be implied into the law.  Thus, if a U.S. company is holding trade-secrets in India that are stolen in India, could the U.S. company bring action against the Indian entity that caused the injury (presuming personal jurisdiction over the defendant)?

Remedies Civil Seizure: A key procedural benefit of the DTSA is to offer a mechanism for Civil Seizure ordered by courts and enforced by Federal, State, and/or local law enforcement as a preventive measure (akin to a temporary restraining order).

Remedies: Once misappropriation is found, the court will be authorized to grant injunctive relief as “reasonable.”  If “exceptional circumstances” render injunctive relief is “inequitable” then a court may order a reasonable royalty for the misappropriator’s continued use of the trade secret.  Depending upon how the statute is interpreted, this setup appears to create a presumption of injunctive relief – a stark difference from contemporary patent law doctrine under eBay v. MercExcange.  The statute also provides for compensatory damages for either (i): (I) “actual loss of the trade secret” and, in addition (II) “any unjust enrichment” not compensated in (I); or (ii) a reasonable royalty for the use.  Willful misappropriation can double damages.[7] In these calculations, I suspect that courts will take into account both the market-value of the trade secret as well as the “expenses for research and design and other costs of reproducing the trade secret” that were avoided by the misappropriation. The provision also includes an attorney fee shifting provision limited to cases involving bad-faith or willful-misappropriation.

Remedy against Former Employees: Most trade secret cases involve former employees moving (or starting-up) to a competitor.  A major concern raised against early versions of the bill was that the DTSA would empower employers to prevent such movement.  As amended, the bill now indicates that injunctive relief that would “prevent (or place conditions on) a person from entering into an employment relationship” must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”[8]  Of course, such “threat” does not necessarily mean that the employee expressly threatened misappropriation but rather will likely be based upon circumstantial evidence regarding likelihood of misappropriation (i.e., ‘threat level’).[9]  In addition, the injunction preventing or limiting employment cannot “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”  This bit appears to be directed toward giving credence to non-compete and other limits in various states. However, of key importance is that it only limits injunctive relief and does not appear to limit any cause of action against former employees.  As a consequence, this sets the likelihood of a fight between certain state employment laws that favor employee rights against the new federal trade secret law.

Whistle Blowers: Professor Peter Menell was instrumental in proposing a public policy immunity provision that is included in the DTSA.  The provision would offer immunity from liability (whistle blower protection) for confidential disclosure of a trade secret to the Government or in a Court Filing (made under seal).  The provision includes a notification requirement that employers should immediately implement.

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Notes:

[1] Defend Trade Secrets Act of 2016, S. 1890.

[2] Although trade secret rights are thought of as a form of intellectual property, the bill is clear that the DTSA “shall not be construed to be a law pertaining to intellectual property.”  The result of this could, for example, mean that the intellectual property licensee exception in bankruptcy law would not apply to licenses of trade secret information.  See 11 U.S.C. § 365(n).  [In Bankruptcy Law, Trade Secrets are defined as a form of IP, but it is unclear to me at this point which statute would prevail.]  Because the DTSA is an amendment to the Economic Espionage Act – a criminal law – it will also be codified in Title 18 of the United States Code that is generally directed to “crimes and criminal procedure.”  Although I don’t know exactly, there may be aspects of Title 18 (such as general definitions) that will shape the interpretation of federal trade secret law.  As an example, 18 U.S.C. § 2(b) offers a “general principle” of respondeat superior that “[w]hoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal.”

[3] Consider the popularity of the Uniform Trade Secrets Act in the various states.

[4] Jury trial should still apply to the extent it has in state cases.

[5] The Economic Espionage Act already includes a rule of construction that the statute “shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession, or territory law for the misappropriation of a trade secret, or to affect the otherwise lawful disclosure of information by any Government employee under section 552 of title 5(commonly known as the Freedom of Information Act).”  The DTSA reaffirms this principle by stating that “[n]othing in the amendments made by this section shall be construed to modify the rule of construction under section 1838 of title 18, United States Code, or to preempt any other provision of law.”  The bill provides for original jurisdiction of these trade secret cases in federal district court. However, it does not create exclusive jurisdiction – as such it would be proper for a party to bring such a claim in state court (when permitted by the state court). However, in that case, the other party may attempt to remove the case to Federal Court.  You might also query as to whether the federal claim is a ‘compulsory claim’ under the law such that if someone brings a state-law claim and loses they would later be estopped from bringing the federal claim.

[6] There may also be constitutional limitations on a company owning and controlling that information.

[7] This provision suggests by implication that misappropriation may be non-willful despite the fact that the misappropriation definition includes a mens rea element.

[8] My understanding is that Jim Pooley and Mark Lemley were instrumental in suggesting the addition of this provision that has now put the Bill in form where it is broadly supported by the politicians.

[9] Improperly obtaining a trade secret is a form of misappropriation – this creates some potential confusing situations in the interpretation of the provision.

Federal Circuit Rejects Reduced-Deference for AIA-Trial Decisions

Patent, , , ,

by Dennis Crouch

En banc denials in Merck & Cie v. Gnosis (Fed. Cir. 2016) and S. Alabama Medical v. Gnosis (Fed. Cir. 2016)

The Federal Circuit has denied en banc review of decisions in four inter partes review proceedings brought by Gnosis. Federal Circuit had previously affirmed the Patent Trial and Appeal Board’s IPR determination that the challenged Merck and SAMSF patent claims were invalid as obvious.[1]

The petitions focused on the standard-for-review of factual findings made by the PTAB. The appellate panel applied the “substantial evidence” standard that requires affirmance of challenged factual findings when those conclusions are based upon “more than a mere scintilla” of evidence.  The Supreme Court has restated this standard only requiring that “a reasonable mind might accept [the evidence] as adequate to support [the] conclusion.”  In the appeal, the patentees agreed it is appropriate that PTAB factual conclusions be given deference. However, the patentees argued that the standard should be “clear error” – a lower level of deference.  A way to think about the difference between the two of these is to consider that factual findings by a jury are generally reviewed for substantial evidence (higher deference) while a judge’s factual findings are reviewed for clear error (lower deference).

In most administrative law areas, agency factual determinations are reviewed for substantial evidence.  However, the patentees here argued that the litigation-like setup in this case calls for a litigation-like standard of review, i.e., clear error.  Thus, the primary question presented:

Should PTAB factual findings be reviewed for “clear error” or “substantial evidence” in an appeal of a final written decision in an inter partes review?

In an 11-1 split, the Federal Circuit has denied en banc rehearing on this issue.  Judge O’Malley (joined by Judges Wallach and Stoll) offered her opinion explaining the denial.  Judge Newman dissented.

Judge O’Malley’s opinion appears to be designed to set-up Supreme Court review (if Cuozzo wins its case) or Congressional action.  She writes:

I agree that application of the substantial evidence standard of review is seemingly inconsistent with the purpose and content of the AIA. This court is bound by binding Supreme Court precedent—Dickinson v. Zurko, 527 U.S. 150 (1999)—and this court’s own—In re Gartside, 203 F.3d 1305 (Fed. Cir. 2000)—to apply the substantial evidence standard of review to factual findings by the Board, however. Because Congress failed to expressly change the standard of review employed by this court in reviewing Board decisions when it created IPR proceedings via the AIA, we are not free to do so now. I, thus, concur in the denial of en banc rehearing in this case because there is nothing that could come of our en banc consideration of the question posed. I write separately, however, because I agree with the dissent to the extent it argues that a substantial evidence standard of review makes little sense in the context of an appeal from an IPR proceeding. But the question is one for Congress.

Judge Newman argues that the trial-like setup of the AIA proceedings allows for an important distinction from the Zurko and Gartside decision that requires a full reconsideration of the standards applied to PTAB determinations.

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[1] Merck owns U.S. Patent No. 6,011,040; and SAMSF owns U.S. Patent Nos. 5,997,915, 6,673,381, and 7,172,778 that are licensed to Merck.  The patents relate to methods of using folate to lower a patent’s homocysteine level.

Investing in Patents

Patent

ScreenShot175I’m sitting now with my copy of Russ Krajec‘s new book titled “Investing in Patents.” (released on April 26 on Amazon).  I have known Russ for more than a decade – throughout that time he has been a creative force in rethinking the business of patent law.

The book is designed to be read by business leaders, entrepreneurs, and investors and is the type of book that patent attorneys should be recommending to their clients.  Of course, is will force those patent attorneys to step-up and explain how the patents being sought will serve as good business assets rather than worthless cost sinks.

Congratulations Russ on this great addition.

Design Patent Claim Construction: More from the Federal Circuit

Patent,

Guest post by Sarah Burstein, Associate Professor of Law at the University of Oklahoma College of Law.

Sport Dimension, Inc. v. Coleman Co., Inc. (Fed. Cir. April 19, 2016) Download Opinion

Panel: Moore, Hughes, Stoll (author)

Coleman accused Sport Dimension of infringing U.S. Patent No. D623,714 (the “D’714 patent”), which claims the following design for a “Personal Flotation Device”:

Coleman1

The district court construed the claim as: “The ornamental design for a personal flotation device, as shown and described in Figures 1–8, except the left and right armband, and the side torso tapering, which are functional and not ornamental.” The court, like many other courts and a number of commentators, interpreted the Federal Circuit’s 2010 decision in Richardson v. Stanley Works as requiring courts to “factor out” functional parts of claimed designs. Coleman moved for entry of judgment of noninfringement and appealed the claim construction (along with another issue not relevant to this discussion).

After Coleman’s appeal was docketed, the Federal Circuit disavowed the “factoring out” rule that many had read in Richardson. As discussed previously on this blog, in Apple v. Samsung and again in Ethicon v. Covidien, the court insisted that Richardson did not, in fact, require the elimination of functional elements from design patent claims.

Following this new interpretation of Richardson, the Federal Circuit reversed the district court’s construction of Coleman’s claim. The court stated, for the third time in a year, that district courts should not eliminate portions of claimed designs during claim construction. So it seems that the Federal Circuit’s retreat from Richardson is complete—if that weren’t clear already.

And, for the first time I’m aware of, the court actually explained how it determined whether something is “functional” for the purposes of claim construction. It’s been clear for a while that the court was using a more expansive concept of “functionality” in the context of claim construction than it was using for validity. (For more on this issue, see this recent LANDSLIDE article by Chris Carani.) However, the court hasn’t seemed to acknowledge that disconnect or explain how courts should analyze functionality in the claim construction context. In this case, the court did both. The Federal Circuit stated that the Berry Sterling factors, although “introduced…to assist courts in determining whether a claimed design was dictated by function and thus invalid, may serve as a useful guide for claim construction functionality as well.” (Those factors, discussed here, are very similar to the factors used by courts to determine whether a design is invalid as functional in the trademark context. For more on the trademark test and how it differs from the current design patent test for validity, see here.) Applying the Berry Sterling factors to the facts of this case, the court affirmed the district court’s conclusion that the armbands and tapering were functional.

So in Sport Dimension, it is clear that the Federal Circuit thinks it is important to determine whether an “element” or “aspect” (the court uses those words as synonyms) of a design is functional. And it is very clear that courts are not supposed to completely remove functional “elements” or “aspects” from design patent claims as a part of claim construction. But what are courts supposed to do? Here is what the court said:

We thus look to the overall design of Coleman’s personal flotation device disclosed in the D’714 patent to determine the proper claim construction. The design includes the appearance of three interconnected rectangles, as seen in Figure 2. It is minimalist, with little ornamentation. And the design includes the shape of the armbands and side torso tapering, to the extent that they contribute to the overall ornamentation of the design. As we discussed above, however, the armbands and side torso tapering serve a functional purpose, so the fact finder should not focus on the particular designs of these elements when determining infringement, but rather focus on what these elements contribute to the design’s overall ornamentation.

It’s not at all clear what the court is trying to say here, especially in the highlighted portion (emphasis mine). It seems that perhaps the court is trying to say that, in analyzing infringement, the factfinder should focus on the overall appearance of the claimed design. But if that is what the court meant, then this “claim construction” frolic adds nothing—the infringement test already requires the factfinder to look at the actual claimed design, as opposed to the general design concept.

This portion of the decision also seems to be in some conflict with the court’s decision in Ethicon. In Ethicon, as here, the district court eliminated all the functional portions of the claimed design. Unlike this case, the district court in Ethicon said that all the elements were functional and, thus, the claim had no scope. The Federal Circuit reversed, stating:

[A]lthough the Design Patents do not protect the general design concept of an open trigger, torque knob, and activation button in a particular configuration, they nevertheless have some scope—the particular ornamental designs of those underlying elements.

So Ethicon says that factfinders must look at the “particular ornamental designs” of functional elements. Sport Dimension says they “should not focus on the particular designs of [functional] elements.” These statements could potentially be reconciled by drawing a distinction between the “particular design” of an element/feature and the “particular ornamental design.” But it’s not at all clear what that distinction might be—or whether it makes sense to draw such a distinction at all.

More importantly, it’s not clear what, exactly, the Federal Circuit hopes to gain by making district courts go through this rigmarole. In this case, the accused product looks nothing like the claimed design, as can be seen from these representative images:

Claimed Design

Claimed Design

Accused Product

Accused Product

Yes, they both have armbands with somewhat similar shapes and some tapering at the torso. But the overall composition of design elements is strikingly different. You don’t need to “factor out” anything or “narrow” the claim to reach the conclusion that these designs are plainly dissimilar. (The same was true, by the way, of the facts in Richardson.) Even for designs that are not plainly dissimilar, the Egyptian Goddess test for infringement should serve to narrow claims appropriately where elements are truly functional because one would expect those elements to appear in the prior art. So once again, one is forced to ask what the Federal Circuit is trying to accomplish with these “claim construction functionality” rules—and whether the game is worth the candle.

Federal Cause of Action for Trade Secret Misappropriation

Patent,

The House of Representatives has scheduled a floor vote on the Defend Trade Secrets Act (DTSA) for Wednesday April 27, 2016.  The version up for vote is identical to that passed unanimously by the Senate earlier this spring. [Schedule][S.1890].  President Obama has indicated his support as well.  Nothing is likely to deter the DTSA from passing on Wednesday.  The House Leadership is not permitting further amendments prior to the vote and no strong opposition has been voiced other than a group of law professors. States-rights activists have not suggested any reason why the traditional state-law-tort should not also be a federal cause of action.

In March 2017, Mizzou’s Center for Intellectual Property & Entrepreneurship will host a symposium on implementation and implications of the DTSA.  Proceedings will be published in the Law School’s Business, Entrepreneurship, and Tax Law Review (BETR).