Tag Archives: Licenses

Design Patent Damages at the Supreme Court

by Dennis Crouch

Samsung has filed its opening merits briefs in its design patent damages appeal Samsung v. Apple.  The central issue in the case is the proper statutory interpretation of the design patent damages statute 35 U.S.C. 289 that offers an alternative calculation for damages:

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.

The question for the court is “total profit” from what? Is it the sale of the article-of-manufacture (here, the Galaxy phones) or merely the particular component.  For this case, the particular components would be the front face of the phone and the icon-grid displayed on a user interface screen.  Samsung asks: Where a design patent is applied to only a component of a product, should an award of infringer’s profits be limited to those profits attributable to the component? [Samsung Opening Brief – US Supreme Court]

In a statement to Patently-O, Samsung argued that “If the current ruling is left to stand, it would value a single design patent over the hundreds of thousands of groundbreaking technology patents, leading to vastly overvalued design patents.”  The itself brief cites Professor Rantanen’s 2015 essay for the proposition that the high damage is likely result in an “explosion of design patent assertions and lawsuits.”

The design-patent-damages statute was originally enacted in 1887 as a reaction to the last Supreme Court design patent damages cases that limited lost profit awards. Dobson v. Hartford Carpet Co., 114 U.S. 439 (1885); and Dobson v. Dornan, 118 U.S. 10 (1886).  However, Samsung argues that the 1952 amendments are important here.

Guest Post: 35 USC 289—Grant of Certiorari in Samsung v Apple = The Opportunity for a Better-Crafted Standard for Awarding Total profits

Guest post by Gary L. Griswold.  Mr. Griswold is a Consultant residing in Hudson, WI and was formerly President of and Chief Intellectual Property Counsel for 3M Innovative Properties Company. The paper reflects the views of the author. He wishes to thank Bob Armitage and Mike Kirk for their excellent contributions to the essay.

In August, 2015, I published an article on Patently-O entitled “35 USC 289-After Apple v Samsung, Time for a Better-Crafted Judicial Standard for Awarding “Total Profits.” [i] The article appeared before the Supreme Court granted certiorari in this appeal.[ii] My use of the word “after” was, thus, a bit premature. The crafting of a new judicial standard may actually be accomplished over the next several months, as the Supreme Court considers the damages issue in Apple v. Samsung case later in its current term.

The statutory basis for awarding damages in this case is no “small-change.” 35 USC 289 provides the design patent holder with the infringer’s “total profits” on the “article of manufacture” to which the patented design “has been applied”[iii]. My August article referenced a Patently-O article by Professor Rantanen that included an analysis of the Federal Circuit’s Apple v Samsung decision and its ramifications, suggesting that the section 289 damages provision could induce “an explosion of design patent assertions and lawsuits.”[iv] Indeed, section 289 holds the potential for design patent procurement and assertion to become the next big “patent assertion entity” business model.

Some commentators have suggested that design patents, being sought and accumulated differently from utility patents, are not likely to stimulate much PAE interest. Whatever merit in that view, it needs to be tempered with the realization that greed is the mother of all of this type of business-model invention. One need only reflect on the fact that more than 1,000 qui tam actions for false marking were filed by opportunistic plaintiffs following the 2009 Federal Circuit decision in Forest Group, Inc. v. Bon Tool Co. before such actions were thankfully banished by the “Leahy-Smith America Invents Act.”[v] The prospects for design infringement revenue generation based on the “total profits”-recovery provision in 35 USC 289 could make successful design patent assertion a staggeringly profitable business. The potential for such an outcome as well as an example of such assertion was referenced in the briefs relating to the Apple v. Samsung certiorari petition[vi].

The possibility of a surge in design-patent PAE activity is almost certainly one of many reasons why the Supreme Court granted certiorari—and why it should not squander the opportunity presented in the Apple v. Samsung appeal to provide a reasoned and principled demarcation between those fact patterns where a “total profits” remedy is clearly warranted and those where it is not.

In deciding this appeal, the Supreme Court may focus on what constitutes an “article of manufacture” under section 289. The statute provides a design patent infringer “shall be liable to the [design patent] owner to the extent of [the infringer’s] total profit” if the infringer “applies the patented design … to any article of manufacture.” [vii](emphasis added) But, the patented design is not necessarily synonymous with the article of manufacture itself.

Indeed, for section 289 purposes, an “article of manufacture” has been held to be the entire substrate to which the patented design is applied. For example, it has been held that a boat becomes the “article of manufacture” when the patented design is for the windshield applied to the boat[viii]. Other examples of “articles of manufactures” whose total profits might be subject to a section 289 recovery include (1) a large agricultural combine, when the patented design is for a tire tread applied to a tire used on the combine; (2) an automobile, when the patented design is for the automobile’s rear taillights; and (3) an HDTV, when the patented design is for a semiconductor used in the television.

In my earlier articles, I described such “total profits” recovery scenarios as a problem in need of a judicial solution. I suggested eliminating access to section 289 “total profits” recoveries in situations where a consensus exists that a remedy of this type would be entirely unwarranted. My approach would interpret section 289 as authorizing a total-profits recovery only “if the patented design is substantially the basis for customer demand for the entire article”.[ix] If it is the basis for consumer demand, the section 289 total-profits recovery would apply to the article; if not, a recovery of total profits would not be available for the article.

This approach bears some similarity to the determination of utility patent damages under the entire market value rule[x]. A utility patent on a boat windshield does not allow the value of the boat to be used as the basis for determining a reasonable royalty absent a demonstration that the windshield was the basis for the customer demand for the boat.

In addition, the “customer demand” limitation is consistent with the apparent rationale for enacting section 289 in the first place. Current section 289 and its predecessors replaced a Supreme Court decision[xi] that provided limited damages to design patent owners even where the infringers had applied the patented design to an article of manufacture in order to create the customer demand for the article of manufacture. In such a situation, forcing the copyist to turn over its total profits obtained on the infringing article represents good policy.

However, even under a “customer demand” limitation, section 289 is no timid remedy. It would not involve any form of “apportionment” of the profits to be awarded to the design patent holder on the ground that some proportion of the profits might be attributable to non- design patented factors. Apportionment is not consistent with the Congressional intent when section 289 and its predecessors were enacted.

Moreover, even if the section 289 remedy is unavailable, the patent owner is not left without the right to recover damages. All the remedies otherwise available for patent infringement remain, whether or not a section 289 “total profits” recovery can be secured as long as there is no double recovery of damages[xii].

The Apple v. Samsung case is of particular importance because imposing the “customer demand” standard on section 289 recoveries does not require another act of Congress. The courts are free to interpret statutes to effectuate the purpose Congress had in enacting them. Under section 289, Congress did nothing to preclude the courts from determining what qualifies—and does not qualify—as an “article of manufacture.”

The Federal Circuit sees this judicial flexibility otherwise. It (incorrectly) saw its hands as having been tied by Congress in Apple v. Samsung, stating: “We are bound by what the statute says, irrespective of policy arguments that may be against it”[xiii]. Fortunately, the Supreme Court has the opportunity to see the situation differently.

The Supreme Court may—and should—see it differently. It can define an “article of manufacture” as being limited to objects for which the patented design is substantially the basis for customer demand. Courts have acted similarly in the past to assure that application of a statute will not result in foreseeable outcomes which are clearly inappropriate and manifestly unintended. The emergence of the “entire market value” rule is a good example of where the alleged “infringing product” cannot be reflexively used as the basis for a damages calculation where the “patented invention” is a mere component or feature of the product and not the product itself.

The Court will have, however, some competing approaches to consider in the course of deciding this appeal. Another possible approach to interpreting section 289 is the so-called “separate product” exception. This exception to a section 289 recovery limits the availability of total profits to the smallest separately sold product to which the patented design is applied. While this exception has the potential to limit the possibility of some of the ludicrous outcomes noted above, it is no panacea. For example, it fails to exclude a section 289 recovery where a design patented graphical user interface (GUI) is used in an electronic device which does not involve a separately sold product. This is a serious deficiency because of the difficulty in finding any policy rationale for awarding total profits on an electronic device simply because a design on a GUI used in it is patented.

Apple has, nonetheless, suggested in its responsive brief to “Defendant-Appellants’ Petition for Rehearing en banc” what amounts to a more generalized rendition of a “separate product” exception: “As the panel correctly recognized, this distinctive design was not severable from the inner workings of Samsung’s smartphones, see Op.27-28, in a way that a cupholder is analytically distinct from the overall look-and-feel of a car.”[xiv] (emphasis added) While “severability” appears to be a more general “exception” criterion than simply being a “separate” product, the “severability” approach does not appear to address the deficiency explained above for the “separate product” exception.

If there is a concern with the “customer demand” limitation, it would be whether the limitation is so broad that it swallows most or all of the “total profits” rule. Indeed, there are many factors which cause a purchaser to acquire a particular article of manufacture—most notably its functional aspects. However, to apply the “customer demand” approach, one begins with the customer looking for something in a product space and then making the specific decision to purchase. Everyday products with new, ornamental designs such as specially shaped paper clips are a good example.[xv] While they have a known function, they are most likely purchased for their appearance. An option would be to only consider the ornamental features of a product to determine whether they were substantially the basis for customer demand, but that may well be too narrow and could lead to a total profit remedy for minor differences from an ornamental perspective.

The Supreme Court would not have granted certiorari without a sense that its guidance was needed to properly titrate a powerful damages provision. It can best do so by allowing section 289 to remain a viable incentive to create and commercialize new designs, but then limiting the articles of manufacture qualifying for a “total profits” recovery to those where the patented design is substantially the basis for customer demand for the article of manufacture. Such a holding would secure section 289 as both a distinguishing and distinguished feature of U.S. design patent law.

[i] Griswold, Gary. “35 USC 289 – After Apple v. Samsung, Time for a Better-Crafted Judicial Standard for Awarding “Total Profits”? Patently-O. August 14, 2015. https://patentlyo.com/patent/2015/08/griswold-patent-damages.html

[ii] See U.S. Supreme Court Orders List from March 21, 2016 at 2. http://www.supremecourt.gov/orders/courtorders/032116zor_h3ci.pdf

[iii] 35 U.S.C. § 289:

“Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.”

[iv] Rantanen, Jason, “Apple v. Samsung: Design Patents Win.” Patently-O. May 18, 2015. https://patentlyo.com/patent/2015/05/samsung-design-patents.html

[v] Laurie Rose Lubiano, “The America Invents Act applies the brakes to the false marking bandwagon.” LEXOLOGY, January 3 2012. http://www.lexology.com/library/detail.aspx?g=401c9bea-d643-4521-bc7d-c63d5b4a25f5

[vi] Samsung Petition for a Writ of Cert. Case No. 15-777. at 36-38. http://www.scotusblog.com/wp-content/uploads/2016/01/15-777_PetitionForAWritOfCertiorari.pdf

[vii] 35 U.S.C. § 289

[viii] Order on Motion for Partial SJ, In re Pacific Coast Marine Windshields Ltd. v. Malibu Boats LLC, Case No. 6:12-cv-33 (M.D. Fl. August 22, 2014)

[ix] See Griswold, https://patentlyo.com/patent/2015/08/griswold-patent-damages.html; See also Griswold, Gary. “35 USC § 289 – An Important Feature of U.S. Design Patent Law: An Approach to its Application.” IPO Law Journal. April 6, 2015. http://www.ipo.org/wp-content/uploads/2015/04/griswold_an-approach.pdf

[x] See Cornell University v. Hewlett-Packard Co., 609 F.Supp. 2d 279, 288-89 (N.D.N.Y. 2009):

(1) The infringing components must be the basis for customer demand for the entire machine including the parts beyond the claimed invention, (2) the individual infringing and non-infringing components must be sold together so that they constitute a functional unit or are parts of a complete machine or single assembly of parts, and (3) the individual infringing and non-infringing components must be analogous to a single functioning unit. It is not enough that the infringing and non-infringing components are sold together for business advantage. Notably, these requirements are additive, not alternative, ways to demonstrate eligibility for application of the entire market value rule.

See also Virnetz, Inc. v. Cisco Systems, Inc., 113 F.3d 1308, 1326 (Fed. Cir. 2014) (Judge Prost: “we recently affirmed that ‘[a] patentee may assess damages on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts.”)

[xi] See Dobson v. Dornan, 118 U.S. 10, (1886); Dobson v. Hartford Carpet Co., 114 U.S. 439 (1885); Dobson v. Bigelow Carpet Co., 114 U.S. 439 (1885); Bigelow Carpet Co. v. Dobson/Hartford Carpet Co. v. Same, 10 F. 385,386; 1882 U.S. App. LEXIS 2295 (E.D. Pa. 1882).

[xii] 35 U.S.C. § 289, paragraph 2: “Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.”

[xiii] Apple v. Samsung, Fed. Cir. Opinion at 27, fn. 1.

[xiv] See Brief in Opp’n to Rhg, Apple v. Samsung, Case No. 2014-1335; 2015-1029 at 27-28 (Fed. Cir. July 20, 2015)

[xv] See, e.g., Design Patent No. USD647,138: https://docs.google.com/viewer?url=patentimages.storage.googleapis.com/pdfs/USD647138.pdf


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

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.

Implementing and Interpreting the Defend Trade Secrets Act

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.

= = = = =


[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

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.

= = = = =

[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.

Battles between the PTO and Courts

The dispute between the University of Alabama, Paul Bryant Jr., and Houndstooth Mafia stems from the latter’s unlicensed use of a houndstooth pattern and other ‘marks’ that relate to the University and former legendary coach Bear Bryant.

Prior to the September 2013 federal complaint, Alabama & Bryant Jr. (the heir) had previously attempted to oppose Houndstooth Mafia’s trademark registration of the mark shown below. However, in a precedential opinion the TTAB sided with the Mafia – finding that the opposers’ failed to show (a) “acquired distinctiveness in their alleged Houndstooth Pattern”; (b) likely confusion as to source or sponsorship; or (c) that the mark is disparaging. As such, the TTAB dismissed with prejudice.


After losing at the board, the named plaintiffs filed the aforementioned trademark infringement and unfair competition lawsuit.

The parties eventually settled and, as part of the consent decree, the district court ordered vacatur of the TTAB decsion.  However, the TTAB refused take any action to vacate its prior decision, writing: “The Final Consent Judgment points to no legal error in our prior decision, and we have not been alerted to any aspect of the public interest that would be furthered by vacatur and would outweigh our initial determination of the precedential value of the prior decision.”

Back in the district court, Alabama then asked for and received a new order from the district court judge — this time expressly ordering the USPTO to vacate its prior determination.  The court wrote: “In June 2015, the TTAB essentially (and inexplicably) treated the court’s Order as a request, and issued a decision refusing to comply with this court’s Order.”

The court’s February 23, 2016 order was quite specific:

Within fourteen (14) days of this order, the USPTO Trademark Trial and Appeal Board is ENJOINED TO AND SHALL VACATE its July 23, 2013 Opinion on Opposition No. 91187103, and otherwise take any further action necessary to effectuate this Order and the Court’s May 27, 2014 Final Consent Judgment, including permitting the HOUNDSTOOTH MAFIA & Design Application (Serial No. 77/342,852) to be registered on the Principal Register with the University as its owner.


The USPTO has complied with the order.  In a March 3 order, the TTAB issued an order vacating its prior decision and ordering that the HOUNDSTOOTH MAFIA mark be registered (and that its ownership be changed to Univ of Alabama). An April 5, 2016 the mark was registered.

Meanwhile . . . The USPTO has filed its notice of appeal with the 11th Circuit court of appeals its brief will be due May 3, 2016.  The agency is likely to challenge the district court’s power to order vacatur under U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994).


Defend Trade Secret Act Moving Forward

by Dennis Crouch

I am always amazed how gridlock is pushed aside to implement intellectual property laws.  In a unanimous vote yesterday, the Senate passed the Defend Trade Secret Act (DTSA, S. 1890) that would create a federal cause of action for trade secret misappropriation and provides for damages and injunctive relief (including a seizure order to prevent dissemination).  Neither Senators Ted Cruz nor Bernie Sanders voted.  The identical bill H.R. 3326 is pending in the House of Representatives and includes 127 co-sponsors (mostly Republican).  President Obama has announced his support as well.

From Senator Hatch:

Trade secrets–such as customer lists, formulas, algorithms, software codes, unique designs, industrial techniques, and manufacturing processes–are an essential form of intellectual property. Other forms of intellectual property, such as patents, copyrights, and trademarks, are covered by Federal civil law. Trade secrets, by contrast, are the only form of U.S. intellectual property where the owner does not have access to a Federal civil remedy for misuse or misappropriation. As a result, billions of dollars each year are lost to trade secret theft, which stifles innovation by deterring companies from investing in research and development. Currently, the only Federal vehicle for trade secret protection is the 1996 Economic Espionage Act, which makes trade secret theft by foreign nationals a criminal offense. But this remedy criminalizes only a small subset of trade secret theft and relies on the thinly stretched resources of the Department of Justice to investigate and prosecute such offenses. . . . State laws today are perhaps even more variable in their treatment of trade secrets than they were at the time the Uniform Trade Secrets Act was proposed in 1979. This next mixed bag of differing legal regimes forces victims of trade secret theft to wade through a quagmire of procedural hurdles in order to recover their losses. . . . Put simply, State law is designed for intrastate litigation and offers limited practical recourse to victims of interstate trade secret theft–the contrast between intrastate and interstate. Maintaining the status quo is woefully insufficient to safeguard against misappropriation. U.S. companies must be able to protect their trade secrets in Federal court.

Most trade secret cases involve former employees who take knowledge with them as they move to a new venture.  The bill apparently includes minor safeguards for whistle-blowing employees and bar a court from preventing a person from moving to a new job. However, as far as I know, no employee groups have supported the Bill.

More info: 

Misappropriation is defined as “(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent by a person who–(i) used improper means to acquire knowledge of the trade secret; (ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was–(I) derived from or through a person who had used improper means to acquire the trade secret; (II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or (iii) before a material change of the position of the person, knew or had reason to know that–(I) the trade secret was a trade secret; and (II) knowledge of the trade secret had been acquired by accident or mistake.”

Improper means “(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and (B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”



Effective Date: The amendments shall apply with respect to any misappropriation of a trade secret for which any act occurs on or after the date of the enactment of this Act.

Not Intellectual Property: The new trade secrecy law “shall not be construed to be a law pertaining to intellectual property for purposes of any other Act of Congress.”  Thus, for example, the bankruptcy IP exception 365(n) would not apply to licenses of trade secret information.

Pharma Looks to Limit Activis-Style Antitrust Liability to Only Reverse Payments

by Dennis Crouch

As part of a litigation settlement agreement, GlaxoSmithKline LLC (“GSK”) granted an exclusive generic marketing license to the challenger Teva for sales of lamotrigine and also agreed not to introduce its own competitive ‘authorized generic’ version. The question in the case, now pending before the U.S. Supreme Court is whether that license structure can raise a plausible antitrust claim under F.T.C. v. Actavis, Inc., 133 S. Ct. 2223 (2013).

Following the settlement a set of direct purchasers (including King Drug) filed a class action lawsuit alleging that the exclusive license settlement was anticompetitive and in violated Sections One and Two of the Sherman Act.  The N.J. Federal District Court sided with GSK/Teva and dismissed the case after interpreting the Actavis rule-of-reason approach to apply only to actual monetary reverse payments.  On appeal, however, the Third Circuit reversed – finding that the exclusivity (including the authorized-generic restriction) should be subjected to a full rule-of-reason analysis to consider the harm done to consumers.[1]  The court wrote: “we think that a no-AG agreement, when it represents an unexplained large transfer of value from the patent holder to the alleged infringer, may be subject to antitrust scrutiny.”

In its petition for writ of certiorari, GSK asks the following question:

Whether the Third Circuit’s sweeping holding that a patentee’s grant of an exclusive license must undergo antitrust scrutiny by courts and juries – even though such a license is specifically permitted under the patent laws – is inconsistent with this Court’s decision in Actavis and decades of this Court’s earlier precedents.[2]

Here, the contracting parties argue that the right to exclusively license a patent is a fundamental aspect of the bundle-of-rights associated with a patent and guaranteed by the Constitution, federal common law, and by statute.[3]  Further, GSK argues that these rights should be seen as “exceptions” to the monopoly laws even if they might restrict competition in the short-term and are simply “not subject to antitrust challenge.”

This will be an interesting case to follow. Kirkland & Ellis Supreme Court lawyer Jay Lefkowitz filed the petition with Bruce Gerstein on the other side. At the petition stage, briefs have also been filed by the Generic Pharmaceutical Association PhRMA, WLF, and the Nat’l Assn of Manufacturers.

= = = = =

[1] King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp., 791 F.3d 388 (3d Cir. 2015).

[2] Supreme Court Docket No. 15-1055.

[3] 35 U.S.C. § 261 (patent holder “may … grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States”).

Shining a Light on Obviousness

In re Cree (Fed. Cir. 2016)[1]

In a straightforward decision, the Federal Circuit has affirmed the PTAB’s decision that Cree’s claimed down-shifted LED invention would have been obvious in light of a combination of three prior art patents.[2]  The basic problem with LED lighting is that it is easy and cheap (these days) to get blue light, but harder to produce light across the spectrum – especially reds.  Cree’s patented approach used a blue LED that is wrapped in a “down-converting luminophoric medium.”  The basic idea is that the blue light energy is absorbed by the medium and then released as white light.  These Fluorescent and phosphorescent materials were already known and commercially available.

The Federal Circuit decision affirming the Board is a demonstration of flexibility of the contemporary obviousness doctrine.  With each of Cree’s attempts to poke holes in the Board’s decision, the Federal Circuit offers an annealing response that make Cree’s arguments seem weak.

Particular holdings:

  1. The PTAB did not err by adopting the patent examiner’s findings rather than writing its own. “There is no force to that argument. It is commonplace in administrative law for a reviewing body within an agency to adopt a fact-finding body’s findings.”
  2. The PTAB’s statements of items “known” in the art did not require a single prior art reference disclosing that knowing. “In context, it is clear that the Board was not using the word ‘known’ to mean ‘disclosed in a single reference.’ Instead, the Board’s statement that down-conversion was a known approach for creating white light from an LED is best understood to mean that persons of skill in the art were aware that down-conversion could be used to make white light out of blue light, regardless of the source of the light.”
  3. A rational, non-hindsight reason for combining the references comes from the references themselves since the later reference offered a brighter LED that could be combined with the earlier to produce higher quality light. “The availability of the high-powered Nakamura LED thus provided the motivation to combine Stevenson’s use of LEDs to create primary colors with Pinnow’s use of a short-wavelength light source to create white light. . . . [Cree’s] accompanying ‘impermissible hindsight’ is essentially a repackaging of the argument that there was insufficient evidence of a motivation to combine the references.”
  4. Cree’s secondary considerations were insufficient to outweigh strong evidence of obviousness. “[S]elfserving statements from researchers about their own work do not have [much] reliability.” Regarding licensing, “Cree … provided press releases evidencing that it … entered into licensing transactions, but [did] not shown that the licenses were based on the merits of the ’175 patent.”  Further, commercial success of a product only operates as a secondary consideration of nonobviousness if coupled with a nexus between that success and the claimed features of the patent.

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[1] This case is on appeal from the Patent Trial & Appeal Board’s ruling in ex parte reexamination No. 90/010,940.

[2] The referenced prior art includes U.S. Patent No. 3,691,482 (“Pinnow”), U.S. Patent No. 3,819,974 (“Stevenson”), and U.S. Patent No. 5,578,839 (“Nakamura”).

Retroactive License to Parts Exhausts Patent Rights as to Whole

By Dennis Crouch

The Federal Circuit has released an interesting new (though non-precedential) decision on patent exhaustion – in particular the court affirmed a lower court finding of exhaustion based upon a retroactive sublicense filed after the lawsuit was filed and the patents had expired.  The case offers some further guidance as to how patent licenses are treated in complex mergers.

In High Point SARL v. T-Mobile,[1] the patentee (High Point) sued T-Mobile for infringing its patents.[2]  The set of patents themselves have an interesting history.  They were originally owned by AT&T but then spun-off to Lucent when that company was created.  Avaya bought the patents from Lucent in 2000 and then the Luxembourg-based patent assertion entity High Point bought them from Avaya in 2008.

T-Mobile uses the technology allegedly covered by the patents, but it is not the manufacturer.  In particular, various portions of the accused systems were purchased from Alcatel Marketing US, Nokia Siemens Networks US, and Ericsson US.  The district court held (and now the appellate panel) that these parts used in the system were all licensed under the patents and “substantially embodied” the asserted claims.

Retroactive Licenses: For Ericsson US, the court looked to a 1996 cross license between Lucent (then owner of the patents) and LM Ericsson.  That license particularly indicated that LM Ericsson could grant sub-licenses to its subsidiaries and related companies and that those sublicenses could “be made effective retroactively.”

Nunc pro tunc: After the litigation began, Ericsson LM granted its subsidiary Ericsson US a “nunc pro tunc” sublicense that was made retroactive back to 2002. The courts found that retroactive sublicense effective even though the license was conveyed after the patents had expired. Further, the courts found that the retroactive sublicense also retroactively exhausted the patent vis-à-vis products sold by Ericsson US after the 2002 back-date.  The appellate court found that this right to retroactively sub-license was simply paperwork and that, in effect, the subsidiary was always licensed.

Here, Ericsson U.S. was at all times authorized to sell the accused equipment to TMobile because when the sales took place neither Lucent nor any of its successor entities could have sustained an infringement claim based on those sales. To the contrary, if they had attempted to bring suit, LM Ericsson had the unrestricted right … to immediately grant Ericsson U.S. a [retroactive] sublicense, thereby immunizing Ericsson U.S. from any potential infringement liability.

Thus the result was that the parts supplied by Ericsson US were deemed licensed and authorized and thus patent rights associated with those parts were exhausted.

For Alcatel Marketing US, it turns out that in 1996 AT&T had licensed the patents to Alcatel (France). By its terms, the 1996 license extended to both current and future subsidiaries, but was limited only to products “of the kind” being furnished or used by Alcatel back in 1996.  In 2006, Alcatel and Lucent merged, to form Alcatel-Lucent. Alcatel Marketing US was already a subsidiary of Alcatel and merged with a Lucent subsidiary to become Alcatel-Lucent USA.  Of importance, although Alcatel did use and sell parts similar to those at issue here back in 1996, it did not manufacture those parts back then but instead purchased them from Spatial Communications (Alcatel later acquired Spatial).  In reviewing this history, the courts found that the patents were properly licensed to Alcatel Marketing and that the “of the kind” language was broad enough to include more modern switches.

Finally, for Nokia-Siemens US, Siemens originally obtained a patent cross license from AT&T in 1988. That license was extended in 1995 to include an allowance for sublicensing to divested businesses.  In April 2007, Siemens divested its carrier division into a joint venture (Nokia-Siemens BV) and then granted a retroactive sublicense to the new venture.  In 2011, Nokia-Siemens BV granted a retroactive sublicense to its US subsidiary Nokia-Siemens US.  It was this US sub that sold the parts to T-Mobile and, according to the court, those sales were (at least retroactively) licensed under the patents and thus the patent rights exhausted.

Substantial Embodiment and a Combination of Licensed Parts: As suggested above, the authorized supplied parts here do not themselves individually infringe the asserted patents.  However, the particular combination of the parts (along with some other parts) does result in a system that allegedly infringes. In the appeal, High Point argued that the asserted claims include innovative features beyond the licensed parts and that, as a consequence, the patents were not exhausted as to the unique combination claimed.

In Quanta, the Supreme Court roughly addressed this issue – stating that “[M]aking a product that substantially embodies a patent is, for exhaustion purposes, no different from making the patented article itself.”[3] Likewise, in Univis Lens, the court wrote that sales of an article that “embodies essential features of [a] patented invention” exhausts the patent rights.[4]

In the appeal, the appellate panel agreed with the district court’s conclusions that the parts supplied did, in fact, substantially embody the patent – noting that High Point had failed to produce evidence showing that other (unlicensed) aspects of the system “performed any inventive feature of the asserted claims.”

[1] High Point SARL v. T-Mobile USA, Inc., App. No. 15-1235 (Fed. Cir. February 8, 2016) (Judges Reyna, Mayer, and Chen).  District court decision available at High Point SARL v. T-Mobile USA, Inc., 53 F. Supp. 3d 797 (D.N.J. 2014).

[2] U.S. Patent Nos. 5,195,090 (the “’090 patent”), 5,195,091 (the “’091 patent”), 5,305,308 (the “’308 patent”), and 5,184,347 (the “’347 patent”).

[3] Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008). “What is ‘inventive’ about patent claims in the patent exhaustion context is what distinguishes them from the prior art.” LifeScan Scotland, Ltd. v. Shasta Techs., LLC, 734 F.3d 1361, 1369 (Fed. Cir. 2013)

[4] United States v. Univis Lens Co., 316 U.S. 241, 251 (1942).

Lexmark: Presumptions in the Right to Import, Reuse, and Resale

by Dennis Crouch

The en banc holding of Lexmark v. Impression[1] is simple – the principles of Mallinckrodt[2] and Jazz Photo[3] are re-affirmed. In particular, the court reaffirmed (1) that a seller can use its patent rights to block both resale and reuse of a product and (2) that authorized sales of a product abroad does not exhaust the US patent rights associated with that product. As Prof. Rantanen explained, although the holding is simple, the ten-member majority panel took 90+ pages to describe how its conclusions conform with 19th – 21st century Supreme Court precedent and why the patent laws should operate differently than the copyright regime in these cases.

The presumptions are of some importance for those operating on the ground.  Here, the US court will presume that foreign sales of a product do not exhaust the US patent right.  Thus, an importer must obtain a release/license of those rights to avoid liability (assuming a valid and otherwise infringed patent).  Of course, that license right may be implied based upon providing notice of the importation intent. In addition, depending upon the location of sale, UCC  2-312 (or its foreign equivalent) may create a presumption of license depending upon the situation.

With regard to limits on domestic resale/reuse, the presumption continues to be that a bare sale without express restriction is delivered free from any resale or reuse restrictions.  However, once the restriction is in place, it appears to be bound to the product and thus binding upon subsequent owners who have no contractual agreement or relationship with the patentee.  Under the UCC, a bona fide purchaser of a good takes “good title” presumably free of any encumbrance (such as a reuse restriction).  UCC 2-403(1).  However, as state-law, the UCC is trumped by Federal Patent Law which is the source of encumbrance here.  The common law has a long history of prohibiting these types of encumbrances on personal property, but for the Federal Circuit, the patent right overwhelms that tradition.

A Supreme Court petition is likely in this case.  The problem though is that Impression is a rather small generic-cartridge company and lacks the funds to hire a top Supreme Court counsel – perhaps especially important here because of the 200 years of Supreme Court precedent relating to the issues at hand.   That said, Ed. O’Connor (Impression’s litigation counsel) previously represented Independent Ink in the 2006 Illinois Tool Works case before the Supreme Court.

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[1] Lexmark Intern., Inc. v. Impression Products, Inc., App. No. 2014-1617, ___ F.3d ____ (Fed. Cir. February 12, 2016) (en banc). En banc order available at 785 F.3d 565 (Fed. Cir. 2015).

[2] Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).

[3] Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001)

En banc Federal Circuit affirms Mallinkrodt, notwithstanding Quanta

By Jason Rantanen

Lexmark International, Inc. v. Impression Products (Fed. Cir. 2016) (en banc) Download Opinion
Majority opinion authored by Judge Taranto, with Judge Dyk dissenting (joined by Judge Hughes)

 This morning the Federal Circuit issued its en banc opinion in the closely watched Lexmark case.  In a behemoth 92 page opinion by Judge Taranto, the court held that the limitations on the exhaustion doctrine set out in its 1992 Mallinkrodt and 2001 Jazz Photo opinions remain good law, notwithstanding the Supreme Court’s intervening decisions in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) and Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013).

From the majority opinion:

First, we adhere to the holding of Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), that a patentee, when selling a patented article subject to a
single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied. Such resale or reuse, when contrary to the known, lawful limits on the authority conferred at the time of the original sale, remains unauthorized and therefore remains infringing conduct under the terms of § 271. Under Supreme Court precedent, a patentee may preserve its § 271 rights through such restrictions when licensing others to make and sell patented articles; Mallinckrodt held that there is no sound legal basis for denying the same ability to the patentee that makes and sells the articles itself. We find Mallinckrodt’s principle to remain sound after the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), in which the Court did not have before it or address a patentee sale at all, let alone one made subject to a restriction, but a sale made by a separate manufacturer under a patentee-granted license conferring unrestricted authority to sell.

Second, we adhere to the holding of Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), that a U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts in the absence of patentee-conferred authority. Jazz Photo’s no-exhaustion ruling recognizes that foreign markets under foreign sovereign control are not equivalent to the U.S. markets under U.S. control in which a U.S. patentee’s sale presumptively exhausts its rights in the article sold. A buyer may still rely on a foreign sale as a defense to infringement, but only by establishing an express or implied license—a defense separate from exhaustion, as Quanta holds—based on patentee communications or other circumstances of the sale. We conclude that Jazz Photo’s no-exhaustion principle remains sound after the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), in which the Court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise-infringing domestic acts. Kirtsaeng is a copyright case holding that 17 U.S.C. § 109(a) entitles owners of copyrighted articles to take certain acts “without the authority” of the copyright holder. There is no counterpart to that provision in the Patent Act, under which a foreign sale is properly treated as neither conclusively nor even presumptively exhausting the U.S. patentee’s rights in the United States.

Judge Dyk, joined by Judge Hughes, disagreed:

I agree with the government that Mallinckrodt was wrong when decided, and in any event cannot be reconciled with the Supreme Court’s recent decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). We exceed our role as a subordinate court by declining to follow the explicit domestic exhaustion rule announced by the Supreme Court.

They also would take a presumption-based approach to international exhaustion that would treat exhaustion as a default rule:

Second, I would retain Jazz Photo insofar as it holds that a foreign sale does not in all circumstances lead to exhaustion of United States patent rights. But, in my view, a foreign sale does result in exhaustion if an authorized seller has not explicitly reserved the United States patent rights.

My sense is that Supreme Court review is likely given the tensions between Quanta and the Mallinkrodt rule that Judge Dyk and others have identified.  In my view, Judges Dyk and Hughes have the better reading of the pre-Mallinkrodt Supreme Court decisions and the effect of Quanta.  And given the Supreme Court’s tendency to look to patent law statutes when deciding non-statutory issues in copyright law (such as in MGM v. Grokster), I’m not convinced that, should it grant cert, the Supreme Court is going to feel as strongly that patent law’s exhaustion doctrine is different because it is non-statutory while copyright law’s is statutory.

The Maling Decision from Massachusetts on Subject Matter Conflicts

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

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

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

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

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

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


35 U.S.C. 289

35 U.S.C. 289

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.


Guest Post by Prof. Contreras – CSIRO v. Cisco: The Convergence of RAND and non-RAND Royalties for Standards-Essential Patents

Guest Post by Jorge L. Contreras, Associate Professor, University of Utah College of Law. 

In Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc. (Fed. Cir., Dec. 1, 2015), the Federal Circuit established important new guidelines for the calculation of “reasonable royalty” damages for standards-essential patents (SEPs), even in the absence of the patent holder’s commitment to license on reasonable and nondiscriminatory (RAND) terms. Chief Judge Prost, writing for a panel that also included Judges Dyk and Hughes, found that Chief Judge Leonard Davis of the Eastern District of Texas erred by failing, among other things, to account for the “standard-essential status” of a Commonwealth Scientific (CSIRO) patent infringed by Cisco. The decision signals another important step toward the convergence of “reasonable royalty” damages in RAND and other patent cases.


CSIRO is a leading Australian governmental research organization. In 1996 CSIRO obtained U.S. Patent 5,487,069, claiming techniques for addressing “multipath” problems in wireless signal processing. These techniques were later incorporated into IEEE’s 802.11a (“Wi-Fi”) standard, first published in 1999. In connection with the approval of 802.11a, IEEE requested, and CSIRO provided, a Letter of Assurance under which CSIRO committed to license the ‘069 patent to manufacturers of 802.11a-compliant products on “reasonable and nondiscriminatory” (RAND) terms. When later versions of 802.11 were developed, IEEE again requested that CSIRO commit to license the ‘069 patent on RAND terms. CSIRO, however, refused to issue such additional assurances.

In 2001, Cisco acquired Radiata, Inc., a company founded by a former CSIRO scientist to manufacture wireless chips. Radiata had entered into a Technology License Agreement (TLA) with CSIRO in 1998, under which Radiata paid CSIRO royalties for use of the ‘069 patent based on a percentage of Radiata’s chip sale prices. These royalties ranged from 1% to 5% of the chip price, depending on sales volume. When Cisco acquired Radiata, it inherited the TLA and paid CSIRO approximately $900,000 in royalties over the next several years. Cisco stopped paying royalties under the TLA in 2007, when it discontinued the use of Radiata chips in its products. Cisco and CSIRO negotiated for several years regarding an ongoing license for the ‘069 patent, but could not reach agreement and CSIRO sued Cisco for infringement in 2011.

After a four-day bench trial, the District Court determined that the “reasonable” range for royalties for the ‘069 patent was between $0.90 (based on an “informal suggestion” made by Cisco’s chief patent counsel during negotiations in 2005) and $1.90 (based on the maximum rate that CSIRO offered to potential licensees in 2003). CSIRO v. Cisco, 2014 WL 3805817 (E.D. Tex. 2014). (The Court made a slightly different calculation with respect to products sold by Cisco’s Linksys subsidiary, but we will not consider that here). With these ranges in mind, the District Court developed a volume-based royalty table and assessed damages of approximately $16 million against Cisco. Cisco appealed, arguing that the District Court erred in three major regards: (1) by failing to begin its royalty analysis with the price of a Wi-Fi enabled chip, representing the smallest salable patent-practicing unit (SSPPU) in Cisco’s Wi-Fi enabled products, (2) by failing to adjust its reasonable royalty analysis to account for the essentiality of the ‘069 patent to the 802.11 standard, and (3) by basing its royalty determination on the parties’ negotiation positions rather than the TLA. The Federal Circuit found that the District Court erred as to points (2) and (3), vacating the decision below and remanding for recalculation of the damages award.

Apportionment and the Smallest Saleable Patent-Practicing Unit (SSPPU)

In CSIRO, the Federal Circuit reiterated the century-old rule, now embodied in Section 284 of the Patent Act, that patent infringement damages “must reflect the value attributable to the infringing features of the product, and no more.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). It went on to explain that “[t]his principle—apportionment—is the governing rule where multi-component products are involved” (slip op. at 10, internal quotations omitted). The Court noted, however, that the rule of apportionment may be supplemented by additional tools to help determine the incremental value of the patented invention. One of these tools is the SSPPU model: when “a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base” (slip op. at 12).

Cisco argued that the District Court erred by beginning its reasonable royalty analysis using rates derived from inter-party negotiations rather than the SSPPU. The Federal Circuit disagreed, holding that the SSPPU model was inapplicable in the case, as the District Court did not determine a royalty “base” (i.e., the price that is multiplied by a royalty expressed in percentage terms) at all. Instead, the Court used so-called per-unit royalties (i.e., a specific dollar amount per end product). As such, there was no call for use of the SSPPU model, and the District Court did not err by avoiding its use.

Comparable Licenses

As noted above, the District Court determined the applicable range of royalties on the ‘069 patent to be between $0.90 and $1.90 based on figures introduced by the parties at different stages during their licensing negotiations. Cisco argued, however, that the appropriate royalty range should be based on the rates set forth in the TLA entered into by Radiata and CSIRO, as to which Cisco later succeeded. Under the TLA, the royalty rates for Cisco products would have been $0.03 to $0.33 (rates for Linksys products would have been slightly different, but I will disregard these for the sake of simplicity).

The District Court rejected any application of the TLA in its reasonable royalty analysis, reasoning, among other things, that (a) the TLA was a related-party agreement between CSIRO and one of its former scientists, rendering it not comparable to the proposed arm’s length agreement between Cisco and CSIRO, (b) the TLA was entered in 1998, long before any hypothetical negotiation between Cisco and CSIRO, and (c) the TLA royalty rates were based on the price of chips sold by Radiata rather than the value of the invention embodied by the ‘069 patent. To this last point, the District Court reasoned that “[b]asing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value” (CSIRO, 2014 WL 3805817 at *11).

The Federal Circuit rejected most of the District Court’s reasoning regarding the TLA, largely because Cisco and CSIRO renegotiated numerous terms of the TLA following Cisco’s acquisition of Radiata. This renegotiation demonstrated both that the TLA did not embody a “special relationship” between CSIRO and the licensee (as Cisco presumably negotiated at arm’s length) and the timing of the amendments coincided with any hypothetical negotiation that would have been conducted between Cisco and CSIRO. As for the District Court’s discomfort with the TLA’s use of chip prices as the base upon which royalties would be calculated, the Federal Circuit quoted its recent decision in Ericsson, 773 F.3d at 1228,

in which it held that a comparable license may not be excluded from the fact finder’s consideration “solely because of its chosen royalty base.” Given this reasoning, the Federal Circuit held that the District Court erred by excluding the TLA from its analysis and directed the Court on remand to “reevaluate the relevance of the as-amended TLA in its damages analysis” (slip op. at 22).

Interestingly, this case represents the second appellate decision this year in which the admissibility of comparable license agreements has been challenged in RAND royalty determinations. In the prior case, Microsoft v. Motorola, 795 F.3d 1024 (9th Cir. 2015), the Ninth Circuit was more deferential to the District Court’s exclusion of potentially comparable license agreements. In Microsoft, the Circuit Court upheld the District Court’s exclusion of three arm’s length license agreements to which Motorola was a party for reasons including the fact that some agreements were entered into to settle or forestall litigation, they included patents other than the patents at issue, they included cross-licenses and they included royalty caps. It will be interesting to see how the Circuits reconcile their interpretations of this key evidentiary standard in future cases.

Impact of Standardization

Perhaps the most far-reaching implication of CSIRO arises from the Federal Circuit’s holding regarding the impact of standardization on a patent. In the case, the District Court determined a “reasonable royalty” using the well-known framework established in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). Cisco argued that the District Court erred by failing to modify the Georgia-Pacific factors to account for the fact that the ‘069 patent was essential to the 802.11 standard. In particular, the Court failed to disregard any additional compensation that CSIRO might have been able to extract in a hypothetical negotiation solely as a result of the ‘069 patent’s essentiality to the 802.11 standard. This additional compensation, Cisco argued, is not indicative of the incremental value of the patented technology, but of the significant costs that manufacturers would have to incur if forced to switch to an alternative technology (so-called “switching costs”). For this reason, such adjustments to the Georgia-Pacific factors were made by prior courts determining reasonable royalty rates for standards-essential patents (e.g., Microsoft, Ericsson, and In re Innovatio IP Ventures, LLC, 956 F.Supp.2d 925 (N.D.Ill. 2013)).

But CSIRO pointed to a significant distinction with these prior cases. As noted above, CSIRO agreed to license the ‘069 patent on RAND terms to manufacturers of 802.11a-compliant products. But by the time of CSIRO’s suit, 802.11a was largely obsolete and represented only 0.03% of Cisco’s accused products (slip op. at 8). Thus, CSIRO argued and the District Court agreed that CSIRO had no obligation to offer RAND terms to Cisco with respect to its products implementing later versions of 802.11. And because no RAND obligation was implicated, no adjustment to the Georgia-Pacific factors was warranted.

The Federal Circuit disagreed, holding that the incremental value of a standard-essential patent (SEP) should be determined independently of manufacturer switching costs, whether or not the SEP was RAND-encumbered (slip op. at 17). Citing Ericsson, the Court reasoned that “damages awards for SEPs must be premised on methodologies that attempt to capture the asserted patent’s value resulting not from the value added by the standard’s widespread adoption, but only from the technology’s superiority” (id.) The Federal Circuit thus found that the District Court erred by failing to consider the extent to which the value of standardization may have impacted the calculated compensation range for the ‘069 patent, and remanded for further consideration of this issue.

Implications for RAND and Standards

The Federal Circuit’s analysis of the third factor in CSIRO is sensible, but does raise some interesting questions about standards and SEPs. In rejecting CSIRO’s argument that the royalty damages analysis should not be adjusted because the ‘069 patent was not RAND-encumbered, the Federal Circuit noted first that Ericsson distinguished between RAND-encumbered SEPs and SEPs generally (slip op. at 17). On this basis, the court reasoned that even though the ‘069 patent might not be encumbered by a RAND commitment, the court’s reasonable royalty analysis must take into account the fact that the patent was a SEP (and thus correct for excess compensation that could be extracted based on broad industry adoption of the standard).

If this is the case, then what is the difference in the royalty payable with respect to a RAND-encumbered SEP and the royalty payable with respect to an unencumbered SEP? The result in CSIRO suggests that there is no difference at all. In the case of RAND-encumbered SEPs, the patent holder agrees to charge a “reasonable royalty”, which the courts have calculated using a modified version of the Georgia-Pacific framework. But Section 284 of the Patent Act establishes a “reasonable royalty” as the baseline measure of damages for all patents. Accordingly, a similar reasonable royalty calculation, also using the Georgia-Pacific framework should be used for unencumbered SEPs. And, as held by the Federal Circuit in CSIRO, that calculation must avoid the inclusion of switching costs in the “reasonable” royalty.

In a recent paper, A Unified Framework for RAND and other Reasonable Royalties, 30 Berkeley Tech. L.J. 1447-1499 (2015), Richard Gilbert and I predict this result: namely, the convergence of reasonable royalty damages for RAND-encumbered and unencumbered patents. As we have written, and as the Federal Circuit has repeatedly confirmed, the appropriate measure of damages in patent cases, whether or not involving SEPs, is the incremental value of the patented invention to the product in which it is incorporated.

But if royalty rates for RAND-encumbered SEPs are no lower than royalty rates for unencumbered SEPs, then what is the point of making a RAND commitment? Does it have any effect at all? Professor Gilbert and I argue that RAND commitments are meaningful even without this royalty differential. Most importantly, a SEP holder that makes a RAND commitment severely limits its ability to obtain an injunction to prevent infringement by manufacturers of standardized products. Holders of unencumbered SEPs, on the other hand, have not committed to license their patents, and may not face the same hurdles to obtaining injunctive relief. Then, as predicted by Farrell, Lemley, Shapiro and others, they could use the leverage conferred by the threat of an injunction to extract a higher (unreasonable?) royalty from manufacturers of standardized products without having to resort to a judicial damages determination (which, as we have seen, will be limited to a “reasonable” royalty). This possibility has significant implications, particularly given the increasing acquisition and assertion of SEPs by patent assertion entities that do not make RAND commitments, a complex topic well beyond the scope of this note, but which I have written about here. For these and other reasons, RAND commitments, and the encouragement of RAND commitments by SSOs and market participants, will continue to play an important role in fostering standardization and innovation.

The Divide between a Covenant and a License

A few weeks ago, I wrote about the pending Supreme Court petition in Meso Scale v. Roche that asks the question of whether a covenant … not to sue for the infringement of a federal patent is a license of that patent as a matter of federal law.

Roche has waived its right to respond, but at least two friend-of-the-court briefs have been filed in the case.

Spectrum Five is a satellite broadcast company and is concerned that its covenants not-to-sue will not be treated as license rights: “Although [the Supreme] Court has held that licenses and covenants not to sue are the same, lawyers who draft intellectual-property licenses recognize that lower courts have reached conclusions inconsistent with this Court’s. The Delaware courts here have added to those inconsistent conclusions.”

Verato, Inc. indicates its concern that exhaustion principles are greatly muddied if a covenant-not-to-sue isn’t treated as a license because it leaves an open question as to whether a patent is considered exhausted as to third-party-manufactured goods if the manufacturer operates under a covenant-not-to-sue but is not otherwise licensed.

The case still has fairly low odds of being heard by the court, but the potential of having a huge impact – especially if the court distinguishes between a license and a covenant.

Director Michelle Lee: Moving toward Patent Clarity

The following is a post from Under Secretary of Commerce for Intellectual Property and Director of the USPTO Michelle K. Lee and was published on the PTO Director’s blog

Patent quality is central to fulfilling a core mission of the USPTO, which as stated in the Constitution, is to “promote the Progress of Science and useful Arts.” It is critically important that the USPTO issue patents that are both correct and clear. Historically, our primary focus has been on correctness, but the evolving patent landscape has challenged us to increase our focus on clarity.

 Patents of the highest quality can help to stimulate and promote efficient licensing, research and development, and future innovation without resorting to needless high-cost court proceedings. Through correctness and clarity, such patents better enable potential users of patented technologies to make informed decisions on how to avoid infringement, whether to seek a license, and/or when to settle or litigate a patent dispute. Patent owners also benefit from having clear notice on the boundaries of their patent rights. After and after successfully reducing the backlog of unexamined patent applications, our agency is redoubling its focus on quality. 

 We asked for your help on how we can best improve quality—and you responded. Since announcing the Enhanced Patent Quality Initiative earlier this year, we received over 1,200 comments and extensive feedback during our first-ever Patent Quality Summit and roadshows, as well as invaluable direct feedback from our examining corps. This feedback has been tremendously helpful in shaping the direction of our efforts. And with this background, I’m pleased to highlight some of our initial programs under the Enhanced Patent Quality Initiative. 

 First, we are preparing to launch a Clarity of the Record Pilot, under which examiners will include as part of the prosecution record definitions of key terms, important claim constructions, and more detailed reasons for the allowance and rejection of claims. Based on the information we learn from this pilot, we plan to develop best examiner and applicant practices for enhancing the clarity of the record.

 We also will be launching a new wave of Clarity of the Record Training in the coming months emphasizing the benefits and importance of making the record clear and how to achieve greater clarity. Recently, we provided examiners with training on functional claiming and putting statements in the record when the examiner invokes 35 U.S.C. 112(f), which interprets claims under the broadest reasonable interpretation standard and secures a complete and enabled disclosure for a claimed invention. Training for the upcoming year includes an assessment of a fully described invention under 35 U.S.C. 112(a) and best practices for explaining indefiniteness rejections under 35 U.S.C. 112(b).

 Second, we are Transforming Our Review Data Capture Process to ensure that reviews of an examiner’s work product by someone in the USPTO will follow the same process and access the same facets of examination. Historically, we have had many different types of quality reviews including supervisory patent examiner reviews of junior examiners and quality assurance team reviews of randomly selected examiner work product. Sometimes the factors reviewed by each differed, and the degree to which the review results were recorded. With only a portion of these review results recorded and different criteria captured in those recordings, the data gathered was not as complete, useful, or voluminous as it could have been. As a result, the USPTO has been able to identify statistically significant trends only on a corps-wide basis, but not at the technology center, art unit, or examiner levels. We are working to unify the review process for all reviewers and systematically record the same and all review results through an online form, called the “master review form,” which we intend to share with the public. 

 What are the implications of this new process and new form? This new process will give us the ability to collect and analyze a much greater volume of data from reviews that we were already doing, but that were not previously captured in a centralized, unified way. As we roll out this new review process the amount of data we collect will significantly increase anywhere from three to five times. This will allow us to use big data analytic techniques to identify more detailed trends across the agency based upon statistically significant data including at the technology center, art unit, and even examiner levels. Also, this new process will give us better insight into not just whether the law was applied correctly, but whether the reasons for an examiner’s actions were spelled out in the record clearly and whether there is an omission of a certain type of rejection. For example, for an obvious rejection we are considering not only whether a proper obvious rejection was made, but whether the elements identified in the prior art were mapped onto the claims, whether there are statements in the record explaining the rejection, and whether those statements are clear.

 The end result will be the (1) ability to provide more targeted and relevant training to our examiners with much greater precision, (2) increased consistency in work product across the entire examination corps, and (3) greater transparency in how the USPTO evaluates examiners’ work product. You can read more about these and our many other initiatives, such as our Automated Pre-examination Search pilot and Post Grant Outcomes, which incorporates insight from our Patent Trial and Appeal Board and other proceedings back into the examination process on our new Enhanced Patent Quality Initiative page on our website.

 Finally, let me close by emphasizing that our Enhanced Patent Quality Initiative is not a “one-and-done” effort. Coming from the private sector, I know that any company that produces a truly top quality product has focused on quality for years, if not decades. The USPTO is committed to no less. The programs presented here are just a start. My goal in establishing a brand new department within the USPTO was to focus exclusively on patent quality and the newly created executive level position of Deputy Commissioner for Patent Quality will ensure enhanced quality now, and into the future. With your input we intend to identify additional ways we can enhance patent quality as defined by our patent quality pillars of excellence in work products, excellence in measuring patent quality, and excellence in customer service.

 To that end, we will continue our stakeholder outreach and feedback collection efforts in various ways, such as our monthly Patent Quality Chat webinars. The next Patent Quality Chat webinar on November 10 will focus on the programs presented in this blog and our other quality initiatives. I encourage you to join in regularly to our Patent Quality Chats and visit the Enhanced Patent Quality Initiative page on our website for more information.  The website provides recordings of previous Quality Chats as well as upcoming topics for discussion. We are eager to hear from you about our Enhanced Patent Quality Initiative, so please continue to provide your feedback to WorldClassPatentQuality@uspto.gov(link sends e-mail).  Thank you for collaborating with us on this exciting and important initiative!


Guest Post: Restoring “Causal Nexus”

Guest post by Bernard Chao

On September 17, 2015, the Federal Circuit issued another decision in the Apple v. Samsung smartphone war (summarized previously here). In the fourth court decision dealing with injunctions, Apple IV gave new guidance on the level of proof necessary to satisfy the “causal nexus” requirement. Although this requirement demands that patentees prove that the specific infringing feature cause irreparable harm, the majority opinion (by Judge Moore) observed that proving causation was “nearly impossible” in cases involving products with thousands of components. So the court watered down the causal nexus requirement by saying that it was enough for Apple to show the infringing features to be “important to product sales and that customers sought these features in the phones they purchase.” On October 19, 2015, Samsung filed a Petition for Rehearing en banc on this issue. Although I don’t agree with everything Samsung has to say about Apple’s injunction request, I do believe that the full Federal Circuit should revisit the decision and reinvigorate the “causal nexus” requirement.

As I argue in greater depth in my upcoming essay, Causation and Harm in a Multicomponent World
(forthcoming University of Pennsylvania Law Review Online), Apple IV is troubling on both doctrinal and theoretical grounds. On the doctrinal level, the decision fails to appreciate that most multicomponent technology products are made up of countless small advances, not a few far-reaching ones that change consumer preferences. Presumably, Apple chose its most valuable patents to assert against Samsung; but a review of the three Apple patents at issue show how minor the infringing features are — a conclusion that Chief Judge Prost’s dissent also made. If a powerhouse like Apple doesn’t have a pioneering patent to assert, there probably aren’t very many such patents out there. My point is that a single feature rarely, if ever, drives consumers from one technology-based product to another. Holding that causation is present for every important feature is therefore inconsistent with how consumers actually decide to buy multicomponent devices.

On a theoretical level, Apple IV reveals a deeper debate within patent law. Some view patents as a kind of traditional property that allows owners to do with it what they will. Others understand patent law to be focused on the public good. Reviewing Judge Moore’s majority opinion and Judge Reyna’s concurrence reveals that their willingness to accept less evidence of harm has been clouded by their view of patents as a form of traditional property. But this view of patents is wrong. The fundamental purpose underlying patent law is to promote innovation. To the extent that inventors receive financial rewards, it is simply a byproduct of encouraging innovation. This concept is rooted in the Constitution, which authorizes laws “to promote the Progress of Science and the useful Arts . . .” Moreover, the Supreme Court has repeatedly sought to maximize innovation on behalf of the public when shaping various different patent doctrines. Most importantly, that is the view the Court took in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) when it held that patent owners no longer possess the automatic right to exclude others from infringing their patents. They must first satisfy eBay’s equitable four factor test. Of course, the first factor involves showing that the infringing feature actually caused irreparable harm.

In sum, there are both doctrinal and theoretical reasons for the full Federal Circuit to reconsider Apple IV and restore the “causal nexus” requirement so that patentees have to show real causation and harm. The failure to do so will allow patentees to use a permanent injunction (or the threat of one) to force an infringer to take a license at a rate that reflects the value of the injunction, which is often greater than the value of the patented feature. This is the kind of patent holdup that a prudent application of eBay helps avoid.

When is a Covenant-Not-to-Sue a Patent License?

Meso v. Roche (Meso Scale petition & app)

In a new petition for cert, Meso Scale asks the following simple question:

Whether a covenant, promise, or agreement not to sue for the infringement of a federal patent is a license of that patent as a matter of federal law.

Patent licensing is a messy area of law because it is largely governed by state law (or foreign law if contracting abroad), but is also governed by federal patent law.

The Federal Courts have been rather clear that, in the patent context, a covenant-not-to-sue is the equivalent of a license.  See, De Forest Radio Telephone & Telegraph Co. v. United States, 273 U.S. 236 (1927) and TransCore, LP v. Electronic Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009). However, in this case, the Delaware Courts ruled that the covenant-not-to-sue granted by Meso to Roche was “more than a simple consent, but less than” a license. — Thus the question presented.

The importance here for Meso is that, since its covenant-not-to-sue wasn’t seen as a contractual license then Meso wasn’t able to enforce other (implied?) terms of that agreement.  Meso explains this setup in its brief:

In this case, the Delaware courts’ mistaken conclusion that Meso did not grant Roche a license led them further to conclude that Meso was not a party to a license agreement between Roche and respondent IGEN, under which Roche agreed that it would use certain patented technology only within a strictly limited field. By going outside that field, as it has since 2007, Roche placed itself in direct competition with Meso and caused great harm to Meso’s business. Meso therefore sought to enforce the field restrictions in the license agreement against Roche, as the agreement permitted it to do. Because, however, they thought that Meso had not granted Roche a license (but had merely agreed not to sue Roche for otherwise infringing activities), the courts below accepted Roche’s position and held that Meso had no right to enforce the terms of the license agreement.

The issues here continue to be very important and relate to complex litigation and bankruptcy strategies as well.  In its 2013 decision in Already, LLC v. Nike, Inc., 133 S. Ct. 721 (2013) and MedImmune v. Genentech (2007), the Supreme Court considered the impact of covenants-not-to-sue and licenses on federal jurisdiction questions.  Two pending petitions (Mylan v. Apotex and Daiichi Sankyo v. Apotex) focus on the similar issue of patent disclaimer in the context of Hatch-Waxman gaming.  In those cases, a second ANDA filer (Apotex) is trying to trigger an early completion of the first-filer’s 180 days of generic exclusivity by challenging the brand’s patents that, in both cases, have been disclaimed but remain listed in the Orange Book.

In the bankruptcy context, we know that a Trustee generally has power to selectively reject or accept executory contracts.  Section 365(n) creates an exception for licensed IP rights (thus barring an executor of an estate holding patent rights from unilaterally cancelling previously agreed-to licenses).  However, the Delaware court decision implicitly suggests that a covenant-to-sue wouldn’t fit within the exception and may instead be cancelled.

The Meso petition also raises questions involving exhaustion – does exhaustion apply to an otherwise infringing article made subject to a covenant-not-sue — as well as taxation and notice.


Guest Post: A Small Practice Note on Patent Family Licensing with a Billion Dollar Effect?

By François deVilliers, Chief IP Counsel, Plantronics, Inc.

When negotiating a patent license, the family of patents may not have matured fully yet. The “Licensed Patents” are thus normally expressly defined to be “anything related” to the original patents (typically continuing applications and foreign counterparts) and are listed in an exhibit that may be updated during the term of the agreement as additional patents issue or are filed. The term of the license agreement is then usually defined as ending upon “the expiry date of the last to expire of the Licensed Patents.”

There may only be one or two relevant patents but the Licensee is typically amenable to a broader definition of Licensed Patents because this could reduce the likelihood that the Licensor will come knocking again and there is a perception that more licensed patents equals more value. If the license is fully paid up then there is no real problem – a broader definition of Licensed Patents may in fact be better and the expiry date is irrelevant except perhaps for amortization by the accountants.

If there are ongoing royalties then there are a number of concerns.

Firstly, if there is no defined end date when the contract details are entered into the relevant legal and financial systems, there might be no flag to cease royalty payments when the license finally expires. Don’t expect the licensor to notify the licensee of the end date either when it becomes determinable or when it arrives. Do an audit right now of patent license agreements and payments, determine the expiry dates if possible or docket a reminder if not possible and investigate whether any post-expiry license payments have been made and if they can be recovered.

Secondly, licensors have been known to add later-expiring, irrelevant but ostensibly “related” patents to updates of their exhibits. While the US twenty year patent term has alleviated this problem somewhat, all it takes is one “related” patent with a significant patent term adjustment for a licensee to be on the hook for another year or two. Review any updates to exhibits and reject any that add later-expiring irrelevant patents. Be mindful though of the language of the agreement – there may be a risk of a breach of contract claim.

Thirdly, foreign counterparts may expire a year later than their local counterparts. A first-filed US patent without a term extension will expire twenty years from its filing date, while a corresponding UK patent filed up to a year later claiming priority from the US filing will expire twenty years from its filing date. If the license agreement does not comprehend geographic differences in the royalties due, the licensor may end up paying post-expiration royalties in its biggest market as a result of the existence of a later-expiring patent in an irrelevant market.

Of course the best time to deal with these issues is at the time the agreement is negotiated. If at all possible, specify or negotiate a specific date when the license terminates based on the expiry date of a representative and relevant patent. Provide that the license becomes fully paid up on this expiry date with respect to all related or “Licensed Patents” to avoid the possibility of a post-expiry claim based on an extended or later-expiring related patent. If it is not possible to specify an explicit expiry date, include “relevant” in the definition of related patents and require that the licensor motivate any update to the exhibit listing the Licensed Patents. Alternatively (or in addition), provide for breach-free rejection of an updated schedule by the licensor even if the added patent(s) fall within the strict definition of “related patents.” Further, make sure that patents in lesser jurisdictions don’t extend payments in the most important jurisdictions. Finally, the recent Kimble v. Marvel Entertainment ruling reaffirming the bar on post-expiry royalties may be of assistance in any negotiation.