The State of Design Patent Infringement Damages Calculations Following the Battle Between Apple and Samsung

Author: Mike Khoury

Many people have heard of the patent dispute between Apple and Samsung dating back to a 2011 Northern District of California lawsuit. In a legal battle that has lasted over 6 years, gone through two jury trials, and endured appeals to the Federal Circuit and U.S. Supreme Court, one issue remains uncertain: the measure by which to calculate damages in a design patent infringement case.

In 2011, Apple sued Samsung for infringing upon iPhone design patents. The following year, a jury awarded Apple $399 million in design patent infringement damages—Samsung’s entire profit from sales of the infringing phones. Samsung appealed, arguing that the jury’s damage award should have been limited to only part of the profit (as only part of the phone’s design was copied from Apple). After the Federal Circuit affirmed the jury’s award, Apple Inc. v. Samsung Electronics Co., 786 F.3d 983 (Fed. Cir. 2015), the Supreme Court granted certiorari and reversed. Samsung Elecs. Co. v. Apple, Inc., 137 S. Ct. 429, 434 (2016).

At the center of the Supreme Court’s decision is the damages provision specific to design patents under 35 U.S.C. § 289. In relevant part, section 289 reads: “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[.]” (emphasis added).

In interpreting section 289 for the first time, the Supreme Court explained that “[a]rriving at a damages award under § 289 . . . involves two steps. First, identify the ‘article of manufacture’ to which the infringed design has been applied. Second, calculate the infringer’s total profit made on that article of manufacture.” Samsung Electronics, 137 S. Ct. at 434. As used in section 289, the term “article of manufacture,” the Supreme Court continued, “encompasses both a product sold to a consumer and a component of that product.” Id. In other words, “reading ‘article of manufacture’ in § 289 to cover only an end product sold to a consumer gives too narrow a meaning to the phrase.” Id. at 436 (emphasis added). However, not surprisingly, the Supreme Court stopped short of establishing a test for identifying the article of manufacture under section 289 and remanded to the Federal Circuit for reassessing damages. The Federal Circuit, in turn, remanded the case to the district court for further proceedings. Apple Inc. v. Samsung Elecs. Co., 678 Fed. Appx. 1012 (Fed. Cir. Feb. 7, 2017).

The case is now back before Judge Lucy Koh of the Northern District of California. On October 22, 2017, after Apple and Samsung briefed the issue, Judge Koh ordered a new trial. In her order, Judge Koh adopted a test proposed by the Department of Justice (“DOJ”) in an amicus brief filed in the Supreme Court appeal in this case. “The test for determining the article of manufacture for the purpose of § 289 shall be the following four factors: [1] The scope of the design claimed in the plaintiff’s patent, including the drawing and written description; [2] The relative prominence of the design within the product as a whole; [3] Whether the design is conceptually distinct from the product as a whole; and [4] The physical relationship between the patented design and the rest of the product, including whether the design pertains to a component that a user or seller can physically separate from the product as a whole, and whether the design is embodied in a component that is manufactured separately from the rest of the product, or if the component can be sold separately.” Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 U.S. Dist. LEXIS 177199, at *111 (N.D. Cal. Oct. 22, 2017)

This test is short of a victory for either side. As Judge Koh notes, and as expected, the plaintiff bears the burden of persuasion on identifying both the relevant article of manufacture as well as the amount of total profit on the sale of that article. Id. If plaintiff succeeds in meeting both, only then does the burden shift to defendant to present evidence of an alternative article of manufacture and any deductible expenses. Id. at *111-12.

To date, it remains unclear whether this test will withstand scrutiny. That said, given that both Apple and Samsung suggested in their briefs at least some level of acceptance of the test, it is unlikely either party will challenge it. It is likely, however, that Apple and Samsung will settle their dispute short of another trial. A settlement means that, at least for now, the test will not be challenged. Since Judge Koh’s order is not binding on any court, it will be interesting to see whether other courts in the Northern District and within the Ninth Circuit will adopt the same test. But even then, short of an appeal to the Federal Circuit, the issue remains unresolved. For now, though, Judge Koh’s order provides some much-needed guidance.

A more promising appeal, however, comes from Columbia Sportswear North America, Inc. v. Seirus Innovative Accessories, Inc., Case No. 3:17-cv-1781-HZ (S.D. Cal. 2017), a Southern District of California design patent infringement case and the first case involving a jury verdict awarding damages after the Supreme Court’s Samsung decision. Like Judge Koh, Judge Marco Hernandez in Columbia Sportswear also adopted the DOJ’s test, and on September 29, 2017, the jury awarded Columbia $3 million in damages.

Judgement in Columbia Sportswear was entered on November 22, 2017. The parties have 30 days to appeal.

Stay tuned.

Craft Beer Attorneys Can Describe Their Services As Craft Beer Attorneys

Author: Michael Kanach

In an interesting case for intellectual property lawyers specializing in craft beer, distilled spirits, and wine, the trademark dispute between a dozen law firms over the use of the phrase “CRAFT BEER ATTORNEY” is now over.

Craft beer attorneys everywhere are relieved. They can go back to describing themselves as CRAFT BEER ATTORNEYS without the threat of a lawsuit due to a pending application to federally register the trademark for the phrase that describes their legal services.

Like other descriptive terms in the craft brewing industry, such as BREWING COMPANY, BREWERY, ALE, or NE IPA, and descriptive terms in the legal industry, such as ATTORNEY, ESQ. or LAW FIRM, these terms may be used without the apprehension of suit for trademark infringement when used to accurately describe one’s goods or services. Typically, an attempt to register as a trademark a generic and merely descriptive word or phrase will be refused by the United States Patent and Trademark Office (“USPTO”). The public policy behind refusing registration of these words and phrases – or disclaiming them – is to permit individuals and companies to describe their goods and services in fair competition.  In addition, such words and phrases do not indicate a single source of those goods and services, so they do not function as a trademark.

Here, the applicant, the law firm of The Craft Beer Attorney, APC, filed an application to register the trademark CRAFT BEER ATTORNEY in connection with legal services. The application was filed almost three years ago, on January 15, 2015 (Serial No. 86504533). The USPTO sent an office action refusing the mark as (1) generic, and, alternatively, (2) merely descriptive, and (3) lacking sufficient evidence of acquired distinctiveness. This was followed by the Applicant’s response, which overcame the refusals, and a notification of publication was issued on December 16, 2015. On January 5, 2016, the mark was published in the Official Gazette for the purpose of opposition “by any person who believes he will be damaged by the registration of the mark.”

Who would file an opposition? It turns out that eleven law firms filed oppositions in the allotted time: (1) Funkhouser Vegosen Liebman & Dunn Ltd.; (2) Nossaman LLP; (3) GrayRobinson, PA; (4) Tannenbaum Helpern Syracuse & Hirschtritt LLP; (5) Lehrman Beverage Law, PLLC; (6) Davis Wright Tremaine LLP; (7) Ward and Smith PA; (8) Strike & Techel LLP; (9) Martin Frost & Hill PC; (10) Spaulding Mccullough & Tansil LLP; and (11) Wendel Rosen Black & Dean LLP (See USPTO Trademark Trial and Appeal Board (“TTAB”) Opposition No. 91227647 (parent)).

In their Oppositions, the other law firms argued that the trademark CRAFT BEER ATTORNEY was generic and/or descriptive, among other things. A generic name is entitled to no trademark protection, as it is part of the common language that we need to identify such services or goods. A generic name refers to the services or goods, rather than to the mark owner’s brand for the services or goods. A descriptive name is a word or phrase that identifies or describes some aspect, characteristic, or quality of the services or goods to which the mark is affixed in a straightforward way that requires no exercise of imagination to be understood. Descriptive words must acquire distinctiveness or secondary meaning to be protectable as a trademark. In other words, the consumers must come to recognize the mark as designating a single source.

As the Ninth Circuit’s jury instructions state: “Descriptive marks are entitled to protection only as broad as the secondary meaning they have acquired, if any. If they have acquired no secondary meaning, they are entitled to no protection and cannot be considered a valid mark.” Ninth Circuit Manual of Model Civil Jury Instructions, 15.11(last modified September 2017).

These twelve parties litigated before the TTAB for more than a year and a half, and participated in discovery.

On October 31, 2017, the Applicant’s representative, Candace L. Moon, filed an Express Abandonment of Application Serial No. 86504533, seeking to withdraw the application and end the dispute over the name. As a result of the Applicant’s abandonment, judgment was entered against applicant. In a November 7, 2017 Board decision sustaining the oppositions filed by the eleven law firms, the TTAB held that oppositions were sustained and registration to applicant was refused.

Now, all of these attorneys can get back to work representing their craft beer clients and describing themselves as CRAFT BEER ATTORNEYS without the potential threat of a lawsuit.

For more information about Gordon Rees Scully Mansukhani LLP’s Intellectual Property Practice Group, including the firm’s specialization in the craft beer industry, please visit www.grsm.com/practices/food-beverage/craft-breweries intellectual property law. Mr. Kanach is a Partner in the firm’s Intellectual Property and Food & Beverage practice groups, and a frequent speaker and writer on craft beer trademark law.

Further Venue Guidance for Patent Infringement Suits

Author: Conor McElroy

As anticipated, the Supreme Court’s May 22, 2017 TC Heartland LLC v. Kraft Foods Group Brands LLC, 581 U.S. ____ (2017) ruling, which recognized 28 U.S.C. §1400(b) as the exclusive statute governing venue in patent infringement actions, has presented district and circuit courts with the opportunity to provide further guidance on §1400(b). Section 1400(b) states, “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” Before TC Heartland, the vast majority of cases only addressed the first prong (“where the defendant resides”) due to the fact that the first prong’s standard was relatively easy to meet. Essentially, venue was proper anywhere a defendant was subject to personal jurisdiction. TC Heartland changed the analysis by determining that “resides” for purposes of §1400(b) only includes the state of incorporation. As a result, more litigants increasingly rely on the second prong (“where the defendant has committed acts of infringement and has a regular and established place of business”), which is therefore, being addressed and analyzed more by the courts.

On September 11, 2017, the U.S. District Court for the District of Delaware issued two decisions regarding venue challenges in patent cases. In Boston Sci. Corp. v. Cook Grp., Inc., No. 15-980-LPS-CJB, 2017 U.S. Dist. LEXIS 146126 (D. Del. Sept. 11, 2017) and Bristol-Myers Squibb Co. v. Mylan Pharms., Inc., No. 17-379-LPS, 2017 U.S. Dist. LEXIS 146372 (D. Del. Sept. 11, 2017), the District Court gave instructions on various aspects of post-TC Heartland §1400(b), including the burden of proof for a venue challenge, and whether TC Heartland effected an intervening change of law for waiver purposes. As for its analysis of the second prong of §1400(b), the court looked to the words of the statute, as well as some of the few decisions that applied the second prong, and determined that a permanent and continuous physical presence is required. In further elaborating, the Court noted circumstances that did not amount to a permanent and continuous presence. Specifically, simply doing business in a district or being registered to do business in a district, merely demonstrating that a business entity has sufficient “minimum contacts” with a district for purposes of personal jurisdiction, maintaining a website that allows consumers to purchase a defendant’s goods within the district, and simply shipping goods into a district are all insufficient to demonstrate that a defendant has a regular and established place of business in the district. In Boston Scientific, the court granted the defendants’ motion to transfer the case because there was not a regular and established place of business in Delaware, while in Bristol-Myers Squibb, the court ordered further discovery into how the defendant operated its business.

On September 21, 2017, the Federal Circuit also issued post-TC Heartland guidance. In In re Cray Inc., No. 2017-129, 2017 U.S. App. LEXIS 18398 (Fed. Cir. Sept. 21, 2017), the court reversed the District Court for the Eastern District of Texas’s denial of motion to transfer. In doing so, the court identified three general requirements relevant to the §1400(b) “regular and established place of business” venue inquiry. First, there must be a physical place in the district. This “place” need not be a formal office or store, but there must still be a physical, geographical location in the district from which the business of the defendant is carried out.” Therefore, mere virtual spaces or electronic communications do not meet the definition of “place.”

Second, the place must be a regular and established place of business. “Regular” means the business operates in a “steady, uniform, orderly, and methodical manner,” while “established” requires that the place in question must be “settled certainly, or fixed permanently.” Finally, the business must be “the place of the defendant.” In other words, “the defendant must establish or ratify the place of business.” Relevant considerations for this factor include whether the defendant owns or leases the place and whether the defendant conditioned employment on the employee’s continued residence in the place of business. In applying these venue requirements to the specifics of the case, the Federal Circuit found that the facts involving an employee’s home being located in the Eastern District of Texas “do not show that [the defendant] maintains a regular and established place of business in the Eastern District of Texas; they merely show that there exists within the district a physical location where an employee of the defendant carries on certain work for his employer.” Thus, the court ruled that case should have been transferred.

While the foregoing cases help to clarify how venue challenges in patent infringement cases may be evaluated, the question of proper venue is often a fact-specific inquiry. Nevertheless, as case law after TC Heartland grows, and as more and more §1400(b) challenges are litigated, the contours and confines of what the “regular and established place of business” prong requires will be clarified. But for now, TC Heartland and cases following it continue to adopt a more restrictive view on venue and the requirements for proper venue.

Protecting “The Thought That We Hate”

Author: Patrick Mulkern

The Supreme Court’s recent decision in Matal v. Tam, 582 U.S. ___ (2017) changes the trademark landscape by striking down the Lanham Act’s “disparagement clause” and rejecting the notion that trademarks are themselves “government speech.”

The Slants and Re-Appropriation of Derogatory Terms

The case stems from a trademark application filed by Simon Tam, the lead singer of the rock band “The Slants.” Although “slants” is often viewed as a derogatory term for persons of Asian descent, and despite suffering years of bullying growing up, Tam and his fellow band members (all of whom are Asian-American) sought to “reclaim” the term and turn the previously-negative stereotype into a point of pride.

Trademark registration is not required for a person or entity to use a word or phrase in commerce, but the protections afforded by the registration are often crucial in helping avoid or prevent consumer confusion regarding source or affiliation. See Matal, 582 U.S. at ___ (quoting Park ‘N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 198 (1985)) (“The Lanham Act provides national protection of trademarks in order to secure to the owner of the mark the goodwill of his business and to protect the ability of consumers to distinguish among competing producers.”).

Here, The Slants ran into that exact problem when other bands started to use the same name. So, in 2010, Tam and the band sought to trademark the name but their application was rejected. The U.S. Patent and Trademark Office (“PTO”) denied the application on the basis that the registration would violate the Lanham Act’s “disparagement clause”—specifically, a concern that the trademark may “disparage . . . or bring . . . into contemp[t] or disrepute” any “persons, living or dead.” See 15 U.S.C. § 1052(a).

Tam appealed at the PTO, but was denied.  He then took his case to federal court, where the en banc Court of Appeals for the Federal Circuit held the disparagement clause to be unconstitutional as an impermissible violation of the First Amendment.  See In re Tam, 808 F.3d 1321 (Fed. Cir. 2015) (en banc).  The Supreme Court affirmed.

Supreme Court Decision

The Supreme Court began by rejecting Tam’s argument that the disparagement clause did not even actually apply to his application because it allegedly only concerned “persons” (that is, individuals and juristic entities) and not racial or ethnic groups. With the scope of the clause decided, the Court then addressed the Government’s claims that (a) trademarks are government speech, and not private speech; (b) trademarks are a government subsidy; and (c) the disparagement clause should be evaluated under a new “government-program” doctrine.

The distinction between “government” speech and “private” speech was the crux of the Government’s case because Supreme Court precedent clearly established that “[t]he Free Speech Clause . . . does not regulate government speech.” Matal, 582 U.S. at ___ (quoting Pleasant Grove City v. Summum, 555 U.S. 460, 467 (2009)). With that broad exception, the Court noted how the doctrine “is susceptible to danger misuse” and for that reason “must exercise great caution before extending” the scope of government speech.

To that end, the Court reasoned trademarks are not “government speech”—despite being registered by the PTO, an arm of the Federal Government—because the government “does not dream up” the content of the marks, “does not edit” the marks, and (normally) will not reject a registration based on the viewpoint it expresses. Additionally, registration “does not constitute approval” of a mark and “it is unlikely that more than a tiny fraction of the public” knows what trademark registration even means. For these reasons, the Court determined, “it is far-fetched to suggest that the content of a registered mark is government speech.”1

The remainder of the opinion resulted in limited precedent as the Court was split 4-4 in approving differing rationales for the ultimate outcome.2 Justices Alito, Roberts, Thomas, and Breyer rejected the Government’s “subsidy” argument, namely because the PTO is not providing cash or its equivalent to trademark applicants—“quite the contrary[,] an applicant for registration must pay the PTO[.]” These Justices also declined the Government’s invitation to apply a newly suggested “government-program” doctrine to save the disparagement clause, by simply merging the “government speech” line of cases with the “government subsidy” line of cases, because the rights conferred by a trademark registration were not valuable enough to warrant protection.

In any event, Justices Alito, Roberts, Thomas, and Breyer determined viewpoint discrimination has always been forbidden when the government creates a limited public forum for private speech (which trademarks were determined to be, earlier in the opinion). The Justices reminded how “[the Supreme Court has] said time and again that ‘the public expression of ideas may not be prohibited merely because the ideas are themselves offensive to some of their hearers.’” Matal, 582 U.S. at ___ (quoting Street v. New York, 394 U.S. 576, 592 (1969)). Justices Kennedy, Ginsburg, Sotomayor, and Kagan expanded on the application of viewpoint discrimination to trademarks and agreed that the First Amendment’s prohibition of such discrimination was fatal to the disparagement clause.

Finally, Justices Alito, Roberts, Thomas, and Breyer declined to determine whether trademarks are “commercial speech”—thus making the disparagement clause subject to the relaxed scrutiny of Central Hudson—because the disparagement clause could not withstand even that lower standard of review. The clause, these Justices determined, serves no “substantial interest” and is not “narrowly drawn.” Most specifically, the argument that the Government has an interest in preventing offensive speech is completely unavailing because “the broadest boast of our free speech jurisprudence is that we protect the freedom to express ‘the thought that we hate.’” Matal, 582 U.S. at ___ (quoting United States v. Schwimmer, 279 U.S. 644, 655 (1929) (Holmes, J., dissenting)).3

Impact

This decision will likely have wide-reaching impact as individuals (i) attempt to follow in The Slants’ footsteps of reclaiming once-derogatory terms, or, conversely, (ii) attempt to capitalize on the ability to sequester certain offensive words and phrases for commercial gain through trademark registration. The effects of the disparagement clause’s demise cannot accurately be forecasted to affect any one industry and, instead, will most likely impact all commercial streams.

A notable circumstance the decision is sure to impact is the current fight between the Washington, DC NFL team (the “Washington Redskins”) and the PTO, over the “Redskins” moniker. See Pro-Football, Inc. v. Blackhorse et al., Case No. 15-1874 (4th Cir. 2015). Six of the team’s trademarks had been cancelled by the PTO after several Native Americans petitioned that they disparaged Native Americans and had been registered in violation of the Lanham Act’s disparagement clause. Given the Matal v. Tam decision and its attendant striking down of the disparagement clause, however, it is likely the Court of Appeals for the Fourth Circuit will side with the team and reinstate the trademark registrations.

In coming to that conclusion, one must question the import of how Simon Tam chose “The Slants” in an effort to “reclaim” the term whereas the NFL team can make no such claim to its selection of “Redskins.” Given the protections afforded by the First Amendment—and the prohibition on viewpoint discrimination—such a calculus is also likely obsolete.

A copy of the Court’s slip opinion can be found here.

_______________________________________________________________________

1 The Court made quick work to distinguish the Government’s central case, Walker v. Texas Div., Sons of Confederate Veterans, Inc., 576 U.S. __ (2015). Walker, which held Texas’ specialty license plates were government speech, was different for three reasons: (i) license plates have long been used to convey state messages; (ii) license plates are often closely identified with the State, since they are manufactured and owned by the State, designed by the state, and serve as a form of government ID; and (iii) Texas maintained direct control over the messages conveyed on its specialty plates. None of those factors are present in trademark registration.
2 Justice Neil Gorsuch was not on the Court when oral argument was heard and took no part in the consideration or decision of the case.
3 Justices Kennedy, Ginsburg, Sotomayor, and Kagan took the position that, regardless of how the private-commercial speech issue is resolved, the evident viewpoint discrimination of the disparagement clause warrants heightened scrutiny—scrutiny it cannot survive.  These Justices did go on to discuss how trademarks likely are not government speech, however, and provided examples of how trademark registration was different from other “government speech” cases. See Matal, 582 U.S. at ___ (citing Legal Services Corp. v. Valazquez, 531 U.S. 533, 540-42 (2001)) (noting viewpoint discrimination exception “where the government itself is speaking or recruiting others to communicate a message on its behalf).

Impression Products v. Lexmark: The Patent Exhaustion Doctrine both at Home and Abroad

Author: Conor McElroy

On May 30, 2017, the U.S. Supreme Court held that patent rights in a product are exhausted by the sale of that product, regardless of any restrictions imposed by the patent holder or where the sale occurred. The case, Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ___ (2017), involved the domestic and international refurbishing and resale of patented toner cartridges in violation of contractual restrictions agreed upon by initial purchasers. Chief Justice John Roberts authored the opinion and was joined by all of the Justices besides Justice Ginsburg (concurring in part and dissenting in part) and Justice Gorsuch (who took no part in the consideration or decision of the case).

According to 35 U.S.C. § 154(a), a patent holder has a twenty year period to “exclude others from making, using, offering for sale, or selling [its] invention throughout the United States or importing the invention into the United States.” Anyone who violates these rights “without authority” may be liable for patent infringement under 35 U.S.C. § 271(a). Yet, this liability does not apply when a patent holder’s rights “exhaust” through a sale of the patented product. The new owner of the product and all subsequent owners are no longer potentially liable for patent infringement.

In this case, Lexmark, a seller of printer toner cartridges, incorporated explicit restrictions in the sales contracts for cartridges as part of its Return Program that limited buyers of the cartridges to using the cartridges once and then transferring the empty cartridge back to Lexmark. Impression Products, a remanufacturer of empty toner cartridges, bought empty Lexmark Return Program cartridges from U.S. and non-U.S. purchasers in order to refill them with toner and then resell them. As an owner of several patents in these cartridges, Lexmark argued that Impression Products infringed their patents by refurbishing and reselling the cartridges despite the unambiguous prohibition of reuse and resale. Furthermore, Lexmark claimed that Impression Products’ importation of cartridges sold abroad into the U.S. also constituted patent infringement. The two issues before the Court were: (1) whether a patent holder’s sale of a patented product under the express restriction that the product not be reused or resold may enforce the restriction through a patent infringement lawsuit; and (2) whether a patent holder’s rights are exhausted when its product is sold abroad, where U.S. patent laws do not apply.

The Court began by analyzing the Return Program cartridges that Lexmark sold in the U.S. After citing a string of Supreme Court cases dealing with patent holder (“patentee”) rights being exhausted after an authorized sale, the Court recognized that it “has long held that, even when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product.” For instance, in a recent case, Quanta Computer, Inc. v. LG Electronics, Inc. 553 U.S. 617 (2008), the Court found that a patentee’s use restrictions included in sales of microprocessors could not be invoked to allege patent infringement. With the well-settled line of precedent, the Court had no problem concluding that “[o]nce sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with is purchasers, not the patent law.” The Court also rejected the Federal Circuit’s holding that patent exhaustion is a default rule but a patentee can withhold the authority to use and sell an item, which then allows enforcement of the restriction through patent infringement lawsuits. The Court explained that “the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is a limit on the scope of the patentee’s rights.” When customers purchase products, they purchase the rights associated with ownership (the right to use, sell, or import the product) not the patentee’s authority to exercise those rights.

As for Lexmark’s other claim that Impression Products’ importation of Lexmark’s patented cartridges into the United States made it liable for patent infringement, the Court determined that there was no reason not to apply patent exhaustion to foreign sales. Lexmark argued that the Patent Act specifically limits patent holders’ monopoly on the making, using, selling, and importing of its products to acts that occur in the United States. Since the U.S. Patent Act does not apply to acts that occur outside the United States, Lexmark argued that there could not be patent exhaustion from its sales since there were no patent rights abroad to exhaust. The Court disagreed. First, the Court noted that the “first sale doctrine” of copyright law, which cuts off copyright owners’ power to restrict the ability of a purchaser of a copy of the copyrighted work from selling or otherwise disposing of that particular copy, applied equally to copies made and sold in the U.S. and those made and sold internationally. See Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013) (holding that the first sale doctrine applied equally to domestic and international sales of copies of textbooks). Since copyright law and patent law share a strong similarity and purpose, “differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense.” Furthermore, nothing in the history of the Patent Act indicated that there should be a deviation from the borderless common law principal that restraints on alienation are to be avoided. Thus, the Court ruled that “restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.”

A copy of the Court’s slip opinion is available here.

TC Heartland v. Kraft Foods: “Residency” in Patent Infringement Suits

Author: Conor McElroy

On May 22, 2017, the U.S. Supreme Court ruled that residency for domestic corporations is determined by its state of incorporation for venue purposes in patent infringement suits. The unanimous decision (from which Justice Neil Gorsuch abstained) reversed the Federal Circuit’s finding that the general venue statute, 28 U.S.C. § 1391(c), and its requirements for residency, applied to patent infringement suits. Instead, the Court ruled that the patent venue statute, 28 U.S.C. §1400(b), is the exclusive statute governing venue in patent infringement actions.

The case, TC Heartland LLC v. Kraft Foods Group Brands LLC, 581 U.S. ____ (2017) involved Kraft Foods (“Respondent”), organized under Delaware law with a principal place of business in Illinois, filing a patent infringement suit against TC Heartland (“Petitioner”), which is headquartered in Indiana and organized under Indiana Law, in the District Court for the District of Delaware. Petitioner argued venue was improper in Delaware since it did not meet the definition of “resid[e]” as set forth in §1400(b) and interpreted in Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957).  The Federal Circuit upheld the District Court’s rejection of Petitioner’s argument based on amendments to 28 U.S.C. §1391 which deem a defendant to have “residency” if it is subject to personal jurisdiction, a test which was met here based on Petitioner’s shipments of allegedly infringing products into Delaware.

In reversing, the Supreme Court analyzed §1400(b), past and present versions of §1391, and case law interpreting the statutes.  According to § 1400(b), “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” For the definition of “resides,” the Court looked to Fourco, which determined “resides” for purposes of §1400(b) only includes the state of incorporation. The inquiry could not end there however. According to the Federal Circuit, subsequent amendments to §1391 have made it applicable to patent infringement cases. Section 1391(c) now provides that, “[f]or all venue purposes,” entities, “whether or not incorporated, shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” Therefore, as concluded by the Federal Circuit, §1391(c), not Fourco, provides the definition of “resides” in §1400(b). To bolster this conclusion, the Federal Circuit cited VE Holding Corp. v. Johnson Gas Appliance Co., 917 F. 2d 1574 (1990), which ruled that similar earlier amendments to §1391 affected the meaning of §1400(b).

The Supreme Court held that the Fourco interpretation of §1400(b) is still the authority. “The current version of §1391 does not contain any indication that Congress intended to alter the meaning of §1400(b) as interpreted in Fourco,” Justice Clarence Thomas wrote in the opinion of the unanimous Court. According to the Court, Congress customarily provides a clear indication that it intends to make a change of that kind in the text of the amended provision. With no such indication present here, it was clear to the Court that §1400(b) was not altered by changes to §1391. Furthermore, the Court also noted that the 2011 change to §1391 includes a savings clause stating that it does not apply when “otherwise provided by law.” As a result, the Court held that §1391 “expressly contemplates that certain venue statutes may retain definitions of ‘resides’ that conflict with its default definition.” Therefore, the venue provision found in §1400(b), and the definition of “resides” found in Fourco, apply to patent infringement suits.

A copy of the Court’s slip opinion can be found here.

The Federal Circuit Interprets the On-Sale Bar Under the America Invents Act

Author: Robert Andris

On May 1, 2017, the Federal Circuit Court of Appeals took its first opportunity to interpret the on-sale bar provision of 35 U.S.C. Section 102 under the Leahy-Smith America Invents Act (“AIA”). In Helsinn Healthcare v. Teva Pharmaceuticals, Nos. 2016-1284, 2016-1787, 2017 US App Lexis 7650 (Fed. Cir. May 1, 2016), the court held that the AIA did not change the meeting of the on-sale bar and there was overwhelming evidence that, before the critical date, the patented invention at issue in that case was reduced to practice and ready for patenting.

The case at bar involved four patents covering the pharmaceutical product known as Aloxi. This composition contains the active ingredient palonosetron. Aloxi was sold by plaintiffs as approved for the prevention and treatment of cancer chemotherapy- induced nausea and vomiting (“CINV”). Three of the patents-in-suit were governed by the patentability requirements of the pre-AIA version of Section 102, while one patent was governed by the new language of Section 102 as provided in the AIA. Plaintiff filed suit against various generic drug manufacturers. After an 11-day bench trial, the district court in New Jersey issued a one-page Memorandum of Decision. The court held that the patents were infringed, not invalid as obvious, and that the requirements for the on-sale bar under either version of the statute were not met. The Federal Circuit Court of Appeals reversed and entered judgment in favor of defendants.

The appellate panel focused its opinion entirely on the pre- and post-AIA versions of the on-sale bar. In cases involving patents with effective filing dates before March of 2013, the old version of the on-sale bar applies. Interpretation of the pre-AIA version of the on-sale bar is governed by the two-step frame-work enunciated by the Supreme Court in Pfaff v. Wells Electronics, 525 U.S. 55 (1998). There, the Court held that: (1) there must be a sale or offer for sale; and, (2) that the claimed invention must also be ready for patenting at least one year before the critical in order for the on-sale bar to apply.

More recently, in Medicines Co. v. Hospira, 827 F.3d 1363 (Fed. Cir. 2016), an en banc panel of the Federal Circuit interpreted when there was “a sale or offer for sale” for purposes of the bar. In order to qualify, the exchange in question must be “analyzed under the law of contracts as generally understood” and “must focus on those activities that would be understood to be commercial sales and offers for sale . . .” According to the Uniform Commercial Code (“UCC”), a sale occurs when there is a “contract between parties to give and to pass rights of property for consideration which the buyer pays or promises to pay the seller for the thing bought or sold.” Because the plaintiff in Helsinn admitted that it entered into a Supply and Purchase Agreement with a third party many years before the first application was filed, and despite the fact that the Agreement was conditioned on FDA approval, the court found an offer for sale had been made and, therefore, the first element of Pfaff was met. Likewise, the court found that the three pre-AIA patents met the ”ready for patenting” element because the Supply and Purchase contract disclosed all of the relevant limitations of the patents themselves, including the precise compounds involved as well as dosages.

Turning to the revised version of the on-sale bar, the court noted that, before the AIA, Section 102(b) barred the patentability of an invention that was “ . . . in public use or on sale in this country, more than one year prior to the date of the application for patent.” Under the AIA, however, new Section 102(a)(1) bars patentability if the invention was “ . . . in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.” Plaintiff argued that Congress’ addition of this “available to the public” language added the requirement that the invention be disclosed to the public in order for the bar to apply. The Federal Circuit disagreed, stating: “Requiring such disclosure as a condition of the on-sale bar would work a foundational change in the theory of the statutory on-sale bar.” Instead, the same requirements of a commercial offer and readiness for patentability apply. Accordingly, for the same reasons, the Federal Circuit held that in Helsinn, the first three patents were barred and the fourth patent was likewise invalid.

For a copy of the slip opinion, click here.

Go! Fight! Win! Designers Prevail as Supreme Court Extends Copyright Protection to Cheerleading Uniforms and Beyond

Author: Hazel Mae Pangan

On March 22, 2017, the U.S. Supreme Court issued its decision in Star Athletica, L.L.C. v. Varsity Brands, Inc., et al., Case No.15-866, a dispute over whether cheerleading uniform designs qualified for protection under the Copyright Act of 1976.  In the proceedings below, Varsity Brands, Inc. (“Varsity Brands”) sued Star Athletica, L.L.C. (“Star Athletica”) for copyright infringement of five cheerleading uniform designs for which Varsity Brands held 2-dimensional artwork copyrights. Using cheerleading uniforms as an example for what is arguably an expansion of copyright protection to the design of garments and clothing, the Court ultimately held that the designs were protectable.

Procedural History

Under Section 101 of the Copyright Act of 1976, the “pictorial, graphic, or sculptural features” of the “design of a useful article” may be copyright protected as works of art if the features “can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.” In this case, the district court granted summary judgment in favor of Star Athletica, holding that the designs were not protectable pictorial, graphic, or sculptural works subject to copyright protection. Rather, the designs simply served the “useful” or “‘utilitarian’ function of identifying the garments as cheerleading uniforms” and thus were not physically or conceptually separable from the “utilitarian” function of the uniform as required for copyright protection under Section 101.

On appeal, the Sixth Circuit Court of Appeals reversed, holding that the uniform designs were “‘separately identifiable’” because the designs could “‘appear side by side’” with a blank uniform—“‘one as a graphic design and one as a cheerleading uniform.’” Moreover, in the Sixth Circuit’s view, the “designs were ‘capable of existing independently’ because they could be incorporated onto the surface of different types of garments, or hung on the wall and framed as art.”

The Court’s Holding

The Supreme Court, with Justice Thomas writing for the majority, affirmed the Sixth Circuit’s reversal, and resolved a circuit split over the correct articulation of the separability test for useful articles. Relying on principles of statutory interpretation, the majority clarified that Sections 101 and 113(a) of the Copyright Act “make clear that copyright protection extends to pictorial, graphic, and sculptural works regardless of whether they were created as free-standing art or as features of useful articles.” The test is “whether the feature for which copyright protection is claimed would have been eligible for copyright protection as a pictorial, graphic, or sculptural work had it originally been fixed in some tangible medium other than a useful article before being applied to a useful article.” In other words, “a feature of the design of a useful article is eligible for copyright if, when identified and imagined apart from the useful article, it would qualify as a pictorial, graphic, or sculptural work either on its own or when fixed in some other tangible medium.” The focus of the test, according to the Court, is “on the extracted feature and not on any aspects of the useful article that remain after the imaginary extraction.” Accordingly, the Court expressly rejected the “physical” and “conceptual” separability distinction in the articulation of the test used by the lower courts, holding that it does not matter whether a feature is physically separable from the useful article because the separability test is only conceptual.

Under this test, the Supreme Court held that one could identify the decorations on the cheerleading uniform designs at issue in this case as “having pictorial, graphic, or sculptural qualities” and that if the “arrangement of colors, shapes, stripes, and chevrons on” the uniforms’ surface “were separated from the uniform and applied in another medium”—like a painter’s canvas—“they would qualify as ‘two-dimensional . . . works of . . . art’” under Section 101.

Marketplace Implications

Writing as amicus curiae in support of Varsity Brands, the Council of Fashion Designers of America (“CFDA”) urged the Court to affirm the Sixth Circuit’s holding that the uniform designs were copyright protectable because a contrary holding would have a “deleterious effect” on the ever-expanding $370 billion American fashion industry, leaving designers vulnerable to copyists and undermining the creativity and effort required for conceiving original fashion and apparel designs. For years, the CFDA and fashion industry have tried to secure legislation specifically granting increased copyright protection to fashion designs.

Under the Court’s majority holding, fashion and apparel designers now have more copyright protection available to them for their designs. Beyond cheerleading uniforms, the Court’s clarification of the separability test extends copyright protection to garments and apparel (and other useful articles and goods) bearing original designs that can be imagined as works of art separate from the useful article on which the designs are affixed.

For a copy of the Court’s slip opinion, click here.

TC Heartland Likely to Bring a Sea Change in Patent Venue Law and the End of Forum Shopping

On December 14, 2016, the U.S. Supreme Court granted certiorari in TC Heartland LLC v. Kraft Food Brands Group LLC to decide the following issue:

Whether the patent venue statute, 28 U.S.C. § 1400(b), which provides that patent infringement actions ‘may be brought in the judicial district where the defendant resides[,]’ is the sole and exclusive provision governing venue in patent infringement actions and is not to be supplemented by the statute governing ‘[v]enue generally,’ 28 U.S.C. § 1391, which has long contained a subsection (c) that, where applicable, deems a corporate entity to reside in multiple judicial districts.

The determination of this issue has potentially significant consequences for accused infringers and their counsel who have routinely faced patent suits in distant venues with plaintiff-friendly local rules and procedures that together drive settlements often unrelated to the value of the asserted technology. As the Petitioner TC Heartland (“Petitioner”) and the amici curiae in support of the cert petition have noted, the Federal Circuit’s unwavering adherence to its holding in VE Holdings Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990) has created conditions that allow rampant forum shopping by plaintiffs and even forum selling by certain district courts. Petitioner and the amici argue that forum shopping and forum selling undermines the economic utility of patent system and ultimately destabilizes public confidence in the judiciary. These important policy concerns, together with strong legal arguments that the Federal Circuit’s holding in VE Holding was misguided, will likely signal the end of an era in patent litigation and restore treatment of patent venue to a pre-1990 scope.

TC Heartland is an Indiana limited liability company headquartered in Indiana. Kraft Food Brands (“Respondent”) is organized and exists under Delaware law and has its principal place of business in Illinois. Respondent sued Petitioner in the United States District court for the District of Delaware, alleging Petitioner’s liquid water enhancer products infringed three patents owned by Respondent. Petitioner moved to dismiss the complaint for lack of personal jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(2). Petitioner also moved to either dismiss the action or transfer venue to the Southern District of Indiana under 28 U.S.C. §§ 1404 and 1406. Petitioner contended that the accused products were designed and manufactured in Indiana and that a mere 2% of its sales in 2014 were shipped to destinations in Delaware at the sole direction of one of its national customers based in Arkansas. Petitioner therefore argued that because it had no local presence in Delaware, was not registered to do business there, and had not solicited sales in Delaware, Delaware was not the “judicial district where the [Petitioner] resides” within the meaning of 28 U.S.C. § 1400(b). Petitioner also argued that the district court was bound by the Supreme Court’s opinion in Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222 (1957), and that the 2011 amendments to § 1391 repealed the statutory language upon which the Federal Circuit’s decision in VE Holding relied in circumventing Fourco.

In the proceedings below, the Magistrate Judge determined that it had specific personal jurisdiction over Petitioner based on a stream-of-commerce type theory under Beverly Hills Fan Co. v. Royal Sovereign Corp., 21 F.3d 1558, 1571 (Fed. Cir. 1994). The Magistrate Judge also rejected Petitioner’s arguments that the 2011 amendment to 28 U.S.C. § 1391 altered the general venue statute and thereby nullified the Federal Circuit’s holding in VE Holding. Accordingly, the judge held that venue was proper based upon a finding of personal jurisdiction.

The district court adopted the Magistrate Judge’s report in full and expressly concluded that Congress’ 2011 amendments to 28 U.S.C. § 1391 “did not undo” the Federal Circuit’s decision in VE Holding. Petitioner timely petitioned the Federal Circuit for a writ of mandamus. The Federal Circuit affirmed the district court’s order, stating that “[t]he arguments raised concerning venue have been firmly resolved by VE Holding, a settled precedent for over 25 years[,]” and asserted that the Supreme Court’s interpretation of patent venue in Fourco is “no longer the law.”

Taking a Step Back: Brief History of Patent Venue Law

Under Section 48 of the Judiciary Act of 1897, Congress limited jurisdiction in patent cases to districts where the defendant inhabited or had a place of business and committed infringing acts. (Act of March 3, 1897, c. 395, 29 Stat. 695.) In 1942, the Supreme Court unequivocally concluded that “Congress did not intend the Act of 1897 to dovetail with the general provisions relating to the venue of civil suits, but rather that it alone should control venue in patent infringement proceedings.” Stonite Prods. C. v. Melvin Lloyd Co., 315 U.S. 561, 563 (1942). Then, in 1948, Congress enacted 28 U.S.C. § 1400(b), which, consistent with the Judiciary Act of 1897 and the Supreme Court’s holding in Stonite, provided:

Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

The newly codified title 28 also included a provision, § 1391, for “venue generally,” which stated in relevant part:

(c) A corporation may be sued in any judicial district in which it is incorporated or licensed to do business or is doing business, and such judicial district shall be regarded as the residence of such corporation for venue purposes.

In 1957, following a circuit split that developed over whether corporate residence under § 1391 applied to the term “resides” in § 1400(b), the Supreme Court held that the patent venue statute was to be read in isolation and not within the context of the general venue statute: “28 U.S.C. § 1400(b) . . . is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. [§] 1391(c).” Fourco , 353 U.S. at . The Supreme Court’s holding in Fourco has never been overruled.

In 1988, Congress changed the statutory language in § 1391 from defining residence “for venue purposes” to defining residence “for purposes of venue under this chapter.” Petitioner and amici in support of the cert petition argue that there is no legislative history to suggest that Congress intended this minor change to the statutory language to supplant Supreme Court precedent or otherwise impact the patent venue statute. In fact, the legislative history shows a Congressional intent to further constrain corporate venue rather than expand it: “[A] corporation that confines its activities to Los Angeles (Central California) should not be required to defend in San Francisco (Northern California).” H.R. Rep. No. 100-889, at 70 (1988). Nonetheless, in 1990, the Federal Circuit deviated from longstanding Supreme Court precedents and the plain language of the statute when it determined that the ministerial amendments to 28 U.S.C. § 1391 in 1988 effectively overruled Stonite and Fourco. VE Holding, 917 F.2d at 1584. The Federal Circuit held that “the first test for venue under § 1400(b) with respect to a defendant that is a corporation, in light of the 1988 amendment to § 1391(c), is whether the defendant was subject to personal jurisdiction in the district of suit at the time the action was commenced.”

As a result of the Federal Circuit’s holding in VE Holding, numerous amici curiae argue that the Federal Circuit effectively expanded the scope of 28 U.S.C. § 1400(b) to permit filing of patent lawsuits in any federal district court where the accused products are sold. See, e.g., In re TC Heartland, LLC, No. 2016-105, at 10 (Fed. Cir. Apr. 29, 2016) (holding that jurisdiction is proper in a patent suit “where a nonresident defendant purposefully shipped accused products into the forum through an established distribution channel and the cause of action for patent infringement was alleged to arise out of those activities”). In at least one recent case, the Federal Circuit held that there was personal jurisdiction in Delaware over a defendant who had never sold an accused product in Delaware because the defendant’s application for drug approval indicated a prospective desire to sell the drug nationally. Acorda Therapeutics Inc. v. Mylan Pharmaceuticals Inc., 817 F.3d 755, 764 (Fed. Cir. 2016). The Federal Circuit concluded this planned future conduct satisfied the minimum contacts requirement, and nothing in the court’s opinion suggests that such conduct would not give rise to personal jurisdiction in every jurisdiction. Id. at 762-63.

Finally, in 2011, Congress enacted further amendments to § 1391, adding section (a), entitled “Applicability of Section.” This section currently reads: “Except as otherwise provided by law . . . (1) this section shall govern the venue of all civil actions brought in district courts of the United States . . . .” 28 U.S.C. § 1391(a)(1) (2012). Shortly thereafter, the Supreme Court interpreted § 1391 as governing venue where a more specific venue provision is lacking. See Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 134 S. Ct. 568, 577 n.2 (2013) (noting “[s]ection 1391 governs ‘venue generally,’ that is, in cases where a more specific venue provision does not apply” and citing by way of example 28 U.S.C. § 1400 as “identifying proper venue for copyright and patent suits”).

TC Heartland’s petition for writ of certiorari seeks a restoration of Supreme Court’s interpretation of § 1400(b) under Fourco and reversal of the decision below.

Arguments in Support of TC Heartland

The brief of amici curiae 56 professors of law and economics persuasively argues that VE Holding ignores fundamental canons of statutory construction, namely that Congress does not alter vital details of a regulatory schemes by vague changes to ancillary provisions, and that a statute should not be read so as to render parts of it mere surplusage. For example, under the Federal Circuit’s interpretation in VE Holding, the latter half of § 1400(b) would be largely superfluous. That is, the term “resides” in § 1400(b) must have some definition other than “a regular and established place of business,” since § 1400(b) already provides that patent venue is proper where the defendant has a “regular and established placed of business.”

The Electronic Frontier Foundation (EFF) as amicus curiae argues that the Federal Circuit’s holding in VE Holding should be overruled in light of existing Supreme Court precedent and the plain language of the patent venue statute in order to cure – in its view – the fundamental lack of fairness and protection to defendants. The EFF also persuasively argues that whereas personal jurisdiction provides sufficiently reliable limits on personal jurisdiction in non-patent suits, the same does not hold true for patent cases because the Federal Circuit has also more-or-less adopted an expansive stream-of-commerce-type theory, holding personal jurisdiction is proper where “defendants, acting in consort, placed the accused [product] in the stream of commerce, they knew the likely destination of the products, and their conduct and connections with the forum state were such that they should reasonably have anticipated being brought into court there.” Beverly Hills Fan, 21 F.3d at 1566. Therefore, the current state of Federal Circuit law often permits essentially nationwide personal jurisdiction.

Upending the (Un)intended Consequences of VE Holding

TC Heartland and the amici in support of TC Heartland’s petition argue forcefully that the consequences of the Federal Circuit’s holding in VE Holding have been overwhelmingly negative and contend that virtually limitless venue under the VE Holding construct has corrupted the underpinnings of the patent system. Whether this is an overly dramatic view of patent law may depend on what side of the courtroom a particular patent litigator sits, but certain underlying facts cannot be disputed. For example, it is true that the Eastern District of Texas still sees a disproportionate number of patent case filings. On average, a quarter of all patent cases are filed in that district – one with a relatively small population and relatively few companies – and in 2015, this figure spiked to 44% of all patent-infringement cases. (By contrast, the Northern District of California, a district of more than double the population and home to many companies, sees only 4-5% of all patent-infringement cases filed annually.) In the Eastern District of Texas’s banner year of 2015, Judge Rodney Gilstrap, referred to as the “busiest patent judge” in the country, heard a quarter of all patent cases filed nationwide. TC Heartland argues that this kind of undue case concentration diminishes the integrity of the patent system. The amici agree, pointing to nuisance-value settlements that arise when patentees have unfettered ability to file in the Eastern District of Texas and then take advantage of the local rules to extract settlements tied to the costs of litigation rather than the value of the asserted technology.

The amici also argue that the Eastern District of Texas, among other districts, have been attempting to attract patent-infringement cases through the use of patent-holder-friendly local rules, standing orders, and other judge-specific practices. For instance, TC Heartland and the amici argue that the time to rule on motions to transfer (150 additional days on average) and the timing and scope of discovery place undue settlement pressure on accused infringers. They argue that ultimately the whole system suffers when monetary settlements are reached as a result of defendants seeking to avoid the burden and cost of discovery and protracted litigation instead of a good faith belief in the legitimacy of the patented technology and its value to society. TC Heartland seeks to upend these practices through its appeal. At the end of the day, these policy arguments regarding the integrity of the overall system may be more persuasive to the Supreme Court justices than any statutory interpretation arguments advanced in the appeal.

The Federal Circuit’s decisions and general confusion at the district court level have set the stage for the Supreme Court to settle this issue. This case promises to be particularly important for large companies accused of patent infringement, as the Supreme Court’s decision will determine whether they may be haled into any forum in the United States or instead into a limited number of venues under § 1400(b). The recent trend of the high court’s limiting access to the federal courts and its propensity for reversing the Federal Court over the last decade strongly suggest a decision in TC Heartland’s favor, a sea change in the practice of patent litigation, and the end of forum shopping in patent cases. Oral arguments in this appeal are set for Monday, March 27, 2017.

Five Steps to Lower the Risk of Trade Secret Theft from Business Partners

As stories of international and domestic hacking and espionage dominate the news cycle, it’s easy to forget that when it comes to trade secrets, employees and business partners—not hackers—pose the biggest threat. See David S. Almeling et al., A Statistical Analysis of Trade Secret Litigation in Federal Courts, 45 Gonz. L. Rev. 291 (2009/2010).

In a recent webinar, Gordon & Rees addressed protection of trade secrets and proprietary information from employee theft. Here, we address some steps to help prevent business partners from misusing your trade secrets.

  1. Identify your trade secrets and control access to them

Before any agreements are drafted or any information or documents are exchanged, be sure you have identified your trade secrets (see also the definition under the Uniform Trade Secrets Act). You can’t protect them unless you know what they are. This sounds like common sense, but surprisingly, in the hustle and bustle of everyday work, not all companies take the time to do this until they’ve realized their trade secrets have ended up in the wrong hands. (Unless it is appropriate for your industry, referring to everything as a “trade secret” is not helpful, either—for example, your business partners are less likely to take your actual trade secrets seriously if you claim that information you have made public are also trade secrets.)

A trade secret “registry” could be considered favorable evidence in court—as long as it is timely updated and actually distributed to employees. See Schalk v. State, 823 S.W.2d 633, 643 (Tex. Crim. App. 1991). This registry will also help your own employees with the marking the proper designations when such information is exchanged with a business partner.

Securing your trade secrets in-house will not only help your case in court, it also helps when it comes to disclosure to third parties, particularly inadvertent disclosure. Chances are, not every employee will require access to every trade secret. Secure physical and electronic access to the appropriate trade secrets to the appropriate personnel.

What measures are appropriate will depend on the circumstances and will likely evolve with time and technology. Information stored on secure servers that had three layers of physical security passwords, 256-character PuTTY keys, with portions possessed by only a single person was found by a court sufficient evidence for a jury to conclude that a trade secrets owner took appropriate measures to protect its trade secrets. Xtec, Inc. v. CardSmart Techs., Inc., No. 11-22866-CIV-ROSENBAUM, 2014 U.S. Dist. LEXIS 184604, at *26 (S.D. Fla. May 15, 2014).

On the other hand, where information was distributed to 600-700 people where at most only 190 people signed confidentiality agreements, and where that same information was not stamped as “confidential,” a court found that no reasonable jury could conclude that “reasonable efforts” were made. Tax Track Sys. Corp. v. New Inv’r World, Inc., 478 F.3d 783, 788 (7th Cir. 2007).

  1. Draft tailored non-disclosure agreements (“NDAs”)

Before any information is exchanged with a business partner, have your attorneys help you draft a non-disclosure/confidentiality agreement tailored to the arrangement. Not only will this agreement help you in case you need to litigate the matter, it will provide the protocols for your business partner to follow.

Some provisions you and your attorneys will want to consider are the return/destruction of trade secrets at certain stages (and certainly when the relationship is terminated), a perpetual non-disclosure and non-use clause when it comes to trade secrets (as opposed to an expiring one), how trade secrets will be identified/marked (and the ability to later identify/mark previously exchanged documents), and requirements for the business partner’s employees to sign individual NDAs and/or obtain training on how to handle trade secrets.  This is not an exhaustive list—work with your attorney to flesh out the agreement.

Be wary of stock or template agreements; many of them may not contemplate the specific issues that may arise in your situation. Many “standard” agreements also contain language that relieve the business partner of its contractual obligations of non-disclosure and non-use as soon as the trade secrets are made public—without specifying that such public disclosure must have been authorized by the owner of the trade secret, and without giving the owner the chance to mitigate the effects and damage of the unauthorized disclosure.

But no matter how perfect the agreement, it won’t matter if it isn’t properly implemented.

  1. Train your own employees

Identify all the employees who will be corresponding with the business partner and make sure you train them. Let them know what information can be exchanged, what cannot, which individuals from the business partner they can exchange information with. Provide them with a written checklist and designate a person most knowledgeable—or better yet, a specialized team to direct their questions to. This team should also conduct some “spot checks” throughout the relationship to make sure protocols are being followed.

If the relationship with the business partner will span more than a couple months, also have a plan in place to retrain your employees in regular intervals.

  1. Train the business partner’s employees

Even if you require individuals from the business partner’s company to sign an NDA, that may not be enough. You may want to provide the partner’s employees with the necessary training, or at least provide the partner with the necessary materials to provide the training themselves (and require them to do so as part of the NDA). Regularly communicate with the partner to make sure they are protecting your trade secrets, and have your employees and your specialized team pay attention to how the business partner is using this information as well.

  1. Create a contingency/emergency plan

Did an employee send a trade secret to the business partner without marking it as such? Has the business partner communicated plans that may violate the NDA?  Has the relationship with the business partner begun to go sour?

Your team should already have a contingency plan in place to deal with these—and other—situations, and protocols to continually improve security and access. Make sure you follow through on enforcing contractual provisions, and make sure you act swiftly.

In closing, remember that when dealing with trade secrets or handling other proprietary, confidential or otherwise private information, nothing beats being prepared.