Apple v. Samsung – Supreme Court

The United States Supreme Court has decided one of the most contentious ongoing legal battles, Samsung Electronics v. Apple, No. 15-777, slip op. (Dec. 6, 2016). On October 11, 2016, the two companies faced off on how much of a $399 million patent infringement award Samsung must pay. Samsung argued that the damages awarded in the case should be greatly reduced to just the profits attributable to the parts that infringed upon Apple’s patents, instead of profits based on the entire phone.

The underlying statute, 35 U.S.C. § 289, states that any person who applies a patented design “to any article of manufacture” is “liable . . . to the extent of his total profit.” The question at issue—one that the high court had not yet interpreted before this case—is the definition of “total profit”: Should the patent holder be entitled to damages based on profits from the entire device, or only profits attributable to the infringing parts?

The Federal Circuit had upheld the Northern District of California’s decision that Samsung’s product infringed Apple’s design and utility patents and diluted Apple’s trade dresses.1 The Court also upheld the district court’s damages award for the design patent infringement. The design patents were based on the design elements on the front face of the iPhone, the design features that extended to the bezel of the iPhone, and “the ornamental design for a graphical user interface for a display screen or portion thereof.” These elements served as the bases for the overall look of the first-generation iPhone in 2007, which, at the time, changed the way other companies began designing their phones. On appeal, Samsung relied on a basic causation argument that Apple had failed to establish that infringement of its limited design patents resulted in any Samsung sales or profits. The Federal Circuit rejected this argument, instead expressly holding that based on the statutory language and prior case law, Section 289 expressly authorized the award of the totality of profits from the article of manufacture bearing the patented design.2 The appellate court also expressly rejected Samsung’s argument that the damages should be limited to the portion of the sales attributed to the infringing product.

The Supreme Court granted certiorari for the limited question of the meaning of Section 289. The Justices’ questioning centered on how to create a test that determines what drives the sale of a product and subsequently what profits should be attributed to such component parts. A popular analogy compared the Volkswagen Beetle to the iPhone. Justice Kagan noted that, “nobody buys a car, even a Beetle, just because they like the way it looks,” but acknowledged that the primary reason for its success could be because of its design. Samsung argued that determining that a company is permitted damages based on total profit for infringing a narrow design patent could produce an absurd result. Samsung argued that, for example, if someone was found to infringe a design patent for a cup holder in a car, to permit them total profits on the sale of the whole car would be absurd.

On December 6, 2016, Justice Sotomayor delivered the opinion for a unanimous Court, holding that the relevant “article of manufacture” for a Section 289 damage award should not be based on the end product sold to the consumer, but rather may be based only on a component of the product. Samsung Electronics v. Apple, No. 15-777, slip op. at 6.  Rejecting the Federal Circuit’s holding that “components of the infringing smartphones could not be the relevant article of manufacture because consumers could not purchase those components separately from the smartphones,” id. at 7-8, the Supreme Court instead held that “the ‘total profit’ for which Section 289 makes an infringer liable is thus all of the profit made from the prohibited conduct, that is, from the manufacture or sale of the ‘article of manufacture’ to which [the patented] design or colorable imitation has been applied,” id. at 5. To determine the calculations the high court created a two-part test: (1) identify the “articles of manufacture” to which the infringed design has been applied; and (2) calculate the infringer’s total profit made on that article of manufacture. Id. However, the Court declined to engage in any analysis of the two-part test and did not provide any guidance to district courts or the Federal Circuit on how to implement the test. Id. at 8. Thus, this area of law will continue to be shaped as the lower courts attempt to analyze damages under Section 289 with the new two-part test.

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1 Apple Inc. v. Samsung Elecs. Co., 786 F.3d 983 (Fed. Cir. 2015).
2 Design patent infringement has long required a different calculation of damages than utility patent infringement. To calculate damages for infringement of utility patents, causation is required to be proved and damages are limited to lost profits caused by the infringement, whereas for infringement of design patents, damages equal to whole products sold were awarded. Section 284 states, “upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonably royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” 35 U.S.C. § 284.

Section 230 Remains a Powerful Weapon to Defend Online Businesses

The Ninth Circuit affirmed the continued  viability of the Section 230 defense, which is often employed by online review boards, social media platforms, and other crowd-sourced website operators. In Kimzey v. Yelp! Inc., 2016 U.S. App. LEXIS 16665, (9th Cir. Sep. 12, 2016), the Court found that the plaintiff could not plead around the broad immunity granted by Section 230 of the Communications Decency Act. Specifically, Yelp’s publication of user-generated speech harmful to plaintiff was not actionable. Id. at 3.

Section 230 provides in relevant part, “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” 47 USC §230(c)(1). “Interactive computer service” is defined as “any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server…” while “information content provider” is separately defined as “any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.” Id. at §230(f)(2)-(3). Section 230 effectively “immunizes providers of interactive computer services against liability arising from content created by third parties.” Kimzey, at 1, citing Fair Hous. Council of San Fernando Valley v. Roommates.Com, LLC, 521 F.3d 1157, 1162 (9th Cir. 2008). Additionally, Section 230 provides a “Good Samaritan” safe harbor, which precludes liability for an operator when it restricts access or scrubs “obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable” content. 47 USC §230(c)(2)(A). Despite these protections, the Section 230 defense is not absolute. Rather, where the “interactive computer service” and the “information content provider” are one in the same, immunity will not apply.

Plaintiff attempted to hold Yelp liable for an unfavorable review about the Plaintiff’s locksmith business by alleging more nuanced theories. First, plaintiff alleged that the post was not genuinely user-generated, and that instead Yelp “caused [the review] to appear” by copying it from another source and further disseminated the review in advertisements on Google and Yelp.  Id., at 10. Second, plaintiff alleged that liability vested because the review appeared with Yelp’s star-rating indicia. Id. at 12. The Court found that neither allegation amounted to a “creation” or “development” by Yelp which would take it beyond the scope of immunity provided by Section 230. Id. at 14.

Because Yelp’s star-rating system comprises a “neutral tool” of “voluntary inputs” from users, it did not amount to “creation” or “development” by Yelp such that the company could be considered an “information content provider.” Id. at 15. Similarly, even if Yelp obtained the review from another website and republished it or provided it to Google as an advertisement, liability would not vest because “[n]othing in the text of the CDA indicates that immunity turns on how many times an interactive computer service publishes ‘information provided by another information content provider.’” Id. at 16.  The Court concluded that “proliferation and dissemination of content does not equal creation or development of content.” Id. The Court of Appeals affirmed the Western District of Washington’s dismissal of Plaintiff’s complaint.

Every online business accused of republishing false, misleading, defamatory, or other unlawful content should have a Section 230 defense close at hand, as the Kimzey decision may further heighten a plaintiff’s burden to show that the objectionable content was created or developed by the business. However, businesses must also recognize that their immunity is not absolute and liability remains, where for example, the business creates the content itself, or where it is “responsible, in whole or in part” for developing the content. Fair Hous. Council v. Roommates.com, LLC, 521 F.3d 1157, 1162 (9th Cir. 2008). Therefore, best practices dictate that online businesses refrain from inducing the creation of any particular content, or exercising substantive editorial authority in the creation of content. Instead, online business should remain committed to providing a neutral platform for third party content generation, and when appropriate, only act to restrict “objectionable” content under Section 230’s “Good Samaritan” safe harbor.

The full opinion in In Kimzey v. Yelp! Inc., 2016 U.S. App. LEXIS 16665, (9th Cir. Sep. 12, 2016), is available here.

National Marks: Who Owns the Trademarks to America’s Famous Landmarks

National Park Concessionaires

In September 2015, a seemingly innocuous contract dispute was filed in the United States Court of Federal Claims (“CFC”) that could lead to the United States losing the trademark rights to some of its most popular national attractions.1 Though the suit is ostensibly based on failed contract negotiations between private national park concessionaire DNC Parks & Resorts at Yosemite, Inc. (“Delaware North”) and the United States Department of Interior (“National Park Service”), the damages claimed by Delaware North directly implicate whether a private entity should—or even can—own trademark protection for national landmarks like The Ahwahnee Hotel and even Yosemite National Park itself.

The National Park Service regularly administers guest services operations within its national parks through private companies, awarding “concession contracts” to these various entities. Delaware North was selected as Yosemite National Park’s official concessionaire in 1993, and came to operate over 1,500 hotel rooms, 25 food and beverage stands, and nearly 20 retail establishments.2 During its tenure, Delaware North also registered several trademarks for places traditionally associated with Yosemite National Park, including THE AWAHNEE, CURRY VILLAGE, WAWONA, BADGER PASS, and YOSEMITE NATIONAL PARK.3

As part of the concession contract renewal process, the National Park Service agreed that any successor concessionaire would be required to pay Delaware North “fair value” for its Yosemite-related property. In the dispute, Delaware North argues this should include at least $44 million in compensation for the Yosemite trademarks. The National Park Service, however, contends the trademarks are likely invalid and, thus, “fair value” is more accurately estimated at $3.5 million. In fact, in response to this lawsuit, the National Park Service filed a Consolidated Petition for Cancellation before the United States Patent and Trademark Office’s Trademark Trial and Appeal Board (“TTAB”) in an attempt to cancel Delaware North’s various Yosemite-related trademarks.4 That TTAB proceeding was suspended, however, because of the action already pending at the CFC. Accordingly, the court will likely be forced to wrestle with whether Delaware North’s trademarks are valid as the civil action seeks to determine if Delaware North was properly compensated though the parties vehemently dispute the value of the relevant intellectual property.

Of note, another concessionaire giant, Xanterra, filed a series of similar trademark applications in October and November 2014, for landmarks related to Grand Canyon National Park—EL TOVAR, HERMITS REST, LOOKOUT STUDIO, BRIGHT ANGEL LODGE, and PHANTOM RANCH.5 These applications came during a similar contract dispute with the National Park Service, though each was expressly abandoned in March 2015 after Xanterra was awarded a temporary, one-year contract.

Arguments for Cancellation

As part of the cancellation analysis, it is important to remember a trademark is entitled to protection only where it is functions as “a source identifier.”6 Through this lens, the U.S. Government argues that Delaware North’s trademarks should be cancelled because they falsely suggest a connection to the National Park Service. Delaware North counters that some of these marks have been in use by Yosemite’s concessionaires for nearly 100 years, with The Ahwahnee Hotel, for example, having been established by Delaware North’s predecessor in 1927. The PTO Examiner agreed with the National Park Service, initially, denying Delaware North’s original application for YOSEMITE NATIONAL PARK because of its false suggestion of a connection and descriptiveness.7 That office action was traversed, however, when Delaware North submitted a heavily redacted version of its 1993 concessionaire contract, allegedly establishing the necessary connection, and a declaration of acquired distinctiveness.

Legislative Efforts

In response to this high profile case, legislatures have taken to banning the registration of trademarks related to popular outdoor destinations. At the federal level, for example, Congress recently enacted a statute intended to prevent similar disputes.8 54 U.S.C. § 302106 prevents the trademark registration of a name historically associated with “buildings and structures on or eligible for inclusion on the National Register (either individually or as part of a historic district), or designated as an individual landmark or as a contributing building in a historic district by a unit of State or local government.” This language would have precluded almost all of Delaware North’s registrations and may prohibit any future attempt to register Xanterra’s presently-abandoned applications.

At the state level, California (home to the most national parks) recently adopted a similar bill that prohibits state park concessionaires from registering or obtaining any ownership interests in “the name or names associated with a state park venue.”9

Overall, these statutory proscriptions appear to embody the notion that parks—national, state, and regional—are held in the public trust, for all people, and thus, their associated property (including trademarks) should be part of that trust, too.10

Moving Forward

The future of this dispute is unclear. In its Opposition to suspend the TTAB proceeding, the National Park Service argues that Delaware North’s CFC complaint intentionally avoids mentioning issues of trademark validity or infringement, though such issues are arguably implicated by Delaware North’s claim for damages. Thus, the Government contends, these issues may not even be addressed.

The National Park Service has also argued the CFC is an inappropriate venue for the trademark dispute because it does not have jurisdiction to either (a) hear Lanham Act claims, or (b) cancel trademark registrations.11 The National Park Service specifically noted cases in which the CFC, itself, proclaimed “we have no jurisdiction over claims for trademark infringement”12 and “this court does not have jurisdiction over plaintiff’s claim for [trademark] cancellation.”13 Delaware North responded to these claims by asserting the CFC has jurisdiction by virtue of its “authority to decide incidental legal issues that arise in the course of deciding a claim within its Tucker Act jurisdiction, even if those issues would be outside the Court’s jurisdiction if asserted as standalone claims.”14 Thus, the issues of trademark validity and infringement may or may not be appropriately raised before the CFC.

Alternatively, the parties may simply come to a settlement, similar to that seen in the National Park Service’s dispute with Xanterra, though the Yosemite contract-at-issue has already been awarded to a different concessionaire. We await further developments.
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1 See DNC Parks & Resorts at Yosemite, Inc. v. United States of America, No. 1:15-cv-01034-PEC (Fed. Cl. 2015).
2 Another popular concessionaire, Xanterra Parks & Resorts, controls operations at Crater Lake National Park, Death Valley National Park, Glacier National Park, Grand Canyon National Park, Rocky Mountain National Park, Yellowstone National Park, and Zion National Park.
3 See U.S. Trademark Reg. Nos. 2772512, 2685968, 2739708, 2720778, and 2715307.
4 United States Dept. of Interior v. DNC Parks & Resorts at Yosemite, Inc., Cancellation No. 92063225 (T.T.A.B. 2016).
5 See U.S. Trademark App. Serial Nos. 86446998, 86444313, 86444295, 86434643, and 86444229.
6 Boston Duck Tours, LP v. Super Duck Tours, LLC, 531 F.3d 1, 12 (1st Cir. 2008) (citing Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 769 (1992)).
7 See DNC Parks & Resorts at Yosemite, Inc., Cancellation No. 92063225, at 1 TTABVUE 12-15.
8 See 54 U.S.C. § 302106 (2016).
9 AB 2249, 2015-2016 Leg. (Cal. 2015).
10 See AB 2249 §§ 2(a), (f).
11 See DNC Parks & Resorts at Yosemite, Inc., Cancellation No. 92063225, at 9 TTABVUE 9-11.
12 Id. at 10 (quoting Lockridge v. United States, 218 Ct. Cl. 687, 690 (1978)).
13 Id. at 10-11 (quoting Boyle v. United States, 44 Fed. Cl. 60, 65 (1999)).
14 DNC Parks & Resorts at Yosemite, Inc., Cancellation No. 92063225, at 15 TTABVUE 10.

Animated Arguments for Patentability under 35 U.S.C. § 101

In McRO, Inc. v. Bandai Namco Games Am. Inc.,1 the Federal Circuit Court of Appeals (“Court”) reversed the decision of the District Court of the Central District of California and found patentee McRO’s claims to be patentable under 35 U.S.C. § 101 as directed to a non-abstract idea under the first step of the two-step patent eligibility framework set forth by the Supreme Court in Alice Corp. Pty. Ltd. v. CLS Bank Int’l.2,3

The Federal Circuit did not analyze the claims under the second step of the Alice framework because the court found the “ordered combination of claimed steps, using unconventional rules that relate sub-sequences of phonemes, timings, and morph weight sets”4 in claim 1 was directed to an improvement in computer animation rather than an abstract idea and prevented the preemption of all rules-based methods for automatically animating the lip synchronization and facial expression of a three-dimensional (“3D”) character.5

1. Procedural History

McRO filed a patent infringement action against several video game developers and publishers (“Defendants”) alleging infringement of U.S. Patent Nos. 6,307,576 (“the ‘576 patent”) and 6,611,278 (“the ‘278 patent”).6 Following a claim construction hearing, the Defendants filed a motion for judgment on the pleadings, asserting the claims in the ‘576 and ‘278 patents were directed to patent ineligible subject matter and therefore invalid under 35 U.S.C. § 101.7

The District Court held the claims were invalid under 35 U.S.C. § 101 because claim 1 of the ‘576 patent was “drawn to the [abstract] idea of automated rules-based use of morph targets and delta sets for lip-synchronized three-dimensional animation”8 and granted the motion.9

On appeal, the Federal Circuit deemed claim 1 of the’576 patent representative of the asserted claims and analyzed the patentability of the same.10

2. The Invention

Claim 1 of the’576 recites:

[a] method for automatically animating lip synchronization and facial expression of three-dimensional characters comprising:

obtaining a first set of rules that define output morph weight set stream as a function of phoneme sequence and time of said phoneme sequence;

obtaining a timed data file of phonemes having a plurality of sub-sequences;

generating an intermediate stream of output morph weight sets and a plurality of transition parameters between two adjacent morph weight sets by evaluating said plurality of sub-sequences against said first set of rules;

generating a final stream of output morph weight sets at a desired frame rate from said intermediate stream of output morph weight sets and said plurality of transition parameters; and

applying said final stream of output morph weight sets to a sequence of animated characters to produce lip synchronization and facial expression control of said animated characters11

(emphasis added).

The claimed invention relates to automatically animating lip synchronization corresponding to a facial expression of a 3D character to produce an accurate and realistic lip synchronization and facial expression of the same.12

The automation is realized by applying the claimed “first set of rules” to a time aligned phonetic transcription (TAPT) of a voice recording13 to determine morph weights sets or key frames marking transition start and end times for each TAPT sub-sequence.14 The final key frames are then applied to an animated character sequence to produce lip synchronization and facial expression control of the character.15

For example, the Court noted that applying the set of rules to a character transitioning from a point of silence to a point commencing speech16 automatically created a key frame between the points at which no phoneme is pronounced to depict more realistic speech by manipulating the character’s facial expressions to “wait until shortly before speaking to begin opening its mouth.”17

In contrast, the Court noted an animator in the prior art system would need to “subjectively identify the problematic sequence and manually fix it by adding an appropriate keyframe”18 between the points as a result of a computer interpolating a continuous transition between the same so that the character would not “open its mouth gradually from the beginning of the sequence through its first utterance.”19

3. The Alice Two-Step Patent Eligibility Framework

To determine whether claim 1 recited patent eligible subject matter, the Court applied the two-step framework set forth by the Supreme Court in Alice.20 The first step evaluates whether the claim is directed to a patent ineligible concept including a law of nature, a natural phenomenon or an abstract idea.21 If the claim is directed to a patent ineligible concept, the framework proceeds to the second step to determine whether the claim recites an element or combination of elements that amount to significantly more than the patent ineligible concept to transform the claim into patent eligible subject matter.22 The purpose of the framework is to prevent the patenting of a patent ineligible concept and thereby the preemption of the use of a law of nature, a natural phenomenon, or an abstract idea.23

4. Analysis

Under the first step of the Alice framework, the Court analyzed the specific features of claim 1 and determined whether the specific features improved a relevant technology and prevented preemption of all processes for realizing automated animated lip-synchronization of 3D characters.24

The Court disagreed with the District Court that claim 1 was “drawn to the [abstract] idea of automated rules-based use of morph targets and delta sets for lip-synchronized three-dimensional animation.”25 The Court found that the District Court’s characterization of the claim was an oversimplification of the features of claim 1 by “failing to account for the specific requirements of the claims.”26

In determining the patentability of a method, the Court emphasized a “court must look to the claims as an ordered combination, without ignoring the requirements of the individual steps.”27 The Court noted claim construction required an interpretation of the claims as “limited to rules that evaluate sub-sequences consisting of multiple sequential phonemes.”28 The Court also noted the rules “define a morph weight set stream as a function of phoneme sequence and times associated with said phoneme sequence”29 and the claims require “applying said first set of rules to each sub-sequence … of timed phonemes.”30

Following the direction of the Supreme Court in Alice, the Court then addressed whether claim 1 was directed to (1) a specific means for improving a relevant technology (e.g., computer animation) or (2) a result that is the abstract idea and is executed by generic processes and machinery.31 The Court concluded claim 1 was directed to an improvement in computer animation rather than an abstract idea because of the “automatic use of rules of a particular type.”32 The Court reasoned that the use of the claimed rules, rather than a computer, achieved the automation of tasks previously completed by animators by a method previously not performed.

For example, the Court determined that even if the process used by animators (e.g., manually fixing a problematic sequence by adding an appropriate key frame) were automated by rules, the process would be outside the “scope of the claims because it does not evaluate sub-sequences, generate transition parameters or apply transition parameters to create a final morph weight set.”33

Therefore, the Court distinguished the invention of claim 1 from the respective patent ineligible inventions in Parker v. Flook,34 Bilski v. Kappos,35 and Alice where the “claimed computer-automated process and the prior method were carried out in the same way.”36

The Court further distinguished the invention of claim 1 from an abstract idea such as a method of organizing information, a mathematical formula or a fundamental economic practice (i.e., “business method”) by noting the method of claim 1 “uses a combined order of specific rules that renders information into a specific format that is then used and applied to create desired results: a sequence of synchronized, animated characters.”37

Subsequently, the Court addressed whether the claimed rules preempted all rules-based automated 3D animation methods.38 Referring to the language of claim 1, the Court concluded the specific structure of the claimed rules did not preempt all rules-based automated 3D animation methods because methods utilizing a different rule structure were not foreclosed.39 Specifically, the Court noted the absence of a “showing that any rules-based lip-synchronization process must use rules with the specifically claimed characteristics.”40

The Court did not analyze claim 1 under the second step of the Alice framework because the Court held claim 1 recited patent eligible subject matter under 35 U.S.C. § 101. The analysis under the second step was not necessary because the Court found claim 1 was directed to an improvement in computer animation rather than an abstract idea and prevented the preemption of all rules-based automated 3D animation methods.41

5. Takeaways

The Court emphasized specific claim features cannot be ignored when determining the patent eligibility of a claim and reiterated the decision in Enfish, LLC v. Microsoft Corp. that a claim is not directed to an abstract idea when an improvement in a technology relevant to the claim is realized by the claim.

The Court also clarified that a claim that recites the automation of a prior method performed by humans can be patent eligible if the claim is performed by a specific means (e.g., the rules) different than the prior method. Therefore, the Court emphasized determining and evaluating the specific means or method for producing a particular result (e.g., automatically animating the lip synchronization and facial expression of a 3D character) over the particular result produced by the claim.

The decision is also notable for its preemption analysis. The United States Patent and Trademark Office (USPTO) has not emphasized preemption in its Interim Eligibility Guidance materials for responding to rejections under 35 U.S.C. § 101. Therefore, patent prosecutors should consider raising non-preemption arguments where applicable under the first step of the Alice framework which may be helpful in avoiding analysis under the second step of the Alice framework and overcoming rejections under 35 U.S.C. § 101.
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1 McRO, Inc. v. Bandai Namco Games Am. Inc., 2016 U.S. App. LEXIS 16703 (Fed. Cir. Sep. 13, 2016).
2 Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014).
3 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *34; 35 U.S.C.S. § 101.
4 Id. at *3.
5 Id. at *33-34.
6 Id. at 11.
7 McRO, Inc. v. Sony Comput. Entm’t Am., LLC, 55 F. Supp. 3d 1214, 1216 (C.D. Cal. 2014).
8 Id. at *1226.
9 Id. at *1230.
10 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *10.
11 U.S. Patent No. 6,307,576, cl. 1, col. 11 ll. 27-47.
12 Id. at col. 11 ll. 44-50.
13 Id. at col. 4 ll. 51-55.
14 Id. at col. 4 ll. 56-58; col. 6 ll. 51-59; col. 9 ll. 10-11; col. 11 ll. 6-12.
15 Id. at cl. 1, col. 11 ll. 44-47.
16 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *9; U.S. Patent No. 6,307,576, col. 7 ll. 36 to col. 9 ll. 22.
17 Id.  at *10-11; U.S. Patent No. 6,307,576, col. 8 ll. 55 to col. 9 ll. 10.
18 Id. at *10.
19 Id.
20 Id. at *21-23.
21 Alice Corp. Pty. Ltd., 134 S. Ct. 2347, 2355 (2014).
22 Id.
23 Alice Corp. Pty. Ltd., 134 S. Ct. 2347, 2354 (2014).
24 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *30.
25 Id. at *23; McRO, Inc. v. Sony Comput. Entm’t Am., LLC, 55 F. Supp. 3d 1214, 1216 (C.D. Cal. 2014).
26 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *25.
27 Id. at *25 (emphasis added).
28 Id. at *20.
29 Id. at *25.
30 Id.
31 Enfish, LLC v. Microsoft Corp., 822 F.3d 1327, 1336 (Fed. Cir. 2016).
32 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *28.
33 Id. at *29.
34 Parker v. Flook, 437 U.S. 584, 585-86 (1978)
35 Bilski v. Kappos, 561 U.S. 593, 611 (2010)
36 McRO, Inc., 2016 U.S. App. LEXIS 16703, at *30.
37 Id.
38 Id. at *31.
39 Id. at *33.
40 Id. at *31.
41 Id. at *33-34.

The “Ballers” In Your Court: Defending Copyrightable Expression

HBO’s hit series Ballers came under attack in the U.S. District Court for the Central District of California by a copyright infringement claim filed by plaintiffs, the owners of an original copyrighted work entitled Off Season. The court, after a thorough comparison of the two works, determined plaintiffs failed to satisfy the extrinsic test of substantial similarity and dismissed the case with prejudice on July 25, 2016.1

1. The Copyrighted Works at Issue

Beginning in May 2007, plaintiffs began sharing their original motion picture trailer, a shortened trailer, a screenplay, and a treatment of their story, the Off Season, with colleagues in the television industry. These materials consisted of four separate copyrights, which were the subject of plaintiffs’ single copyright infringement claim in this case.2 According to the complaint, the Off Season materials found their way to a group of producers, a production company, Dwayne “The Rock” Johnson, Mark Wahlberg, and his manager, Stephen Levinson. In or around December 2008, Wahlberg, Johnson, and Levinson confirmed their interest in producing Off Season with plaintiffs, but negotiations ended when removing plaintiffs’ names from the credits became a condition of the proposed agreement.3

The Off Season tells the story of Nathaniel Brandon Hall (“NBH”), the owner of a nightclub called “The Off Season,” which caters to professional football’s elite clientele who need anonymity so that they may engage in their vices out of the public eye, including bribing a detective to ignore the prostitution, violence, and drugs that frequent the club.4 True to its name, the story line takes place entirely during professional football’s off season.

Ballers tells the story of Spencer Strasmore (“Strasmore”), a retired NFL linebacker who currently works for Anderson Financial, a finance management company with a newly opened sports division.5 Strasmore is played by lead actor, Dwayne Johnson, who counsels his young football protégés not to fall into the same financial mistakes he made during his career as a professional athlete.6 The general story line of Ballers also takes place entirely during professional football’s off season.7

Plaintiffs alleged that the Ballers television series borrowed heavily from the Off Season materials and that both works have substantial similarities in plot, setting, characters, theme, mood, dialogue, and pace.8 Plaintiffs depicted both works as “follo[wing] an African American football player who is essentially a business man who tries to monetize his friendships with other professional football players and athletes to help grow his business.”9 However, the court would find on defendants’ motion to dismiss that “the only actual alleged similarities between the two works relate to unprotected elements.”10 “[A]lthough there are some generic similarities between Ballers and the Off Season, there are no similarities between the actual objective details of the works.”11

2. Ballers Defeats the Off Season’s Claims Under the Extrinsic Test

To demonstrate copyright infringement, a plaintiff must show “(1) ownership of a valid copyright, and (2) copying of constituent elements of that work that are original.”12 Copying may be established by demonstrating (1) “that the [defendant] had access to plaintiff’s copyrighted work,” and (2) “that the works at issue are substantially similar in their protected elements.”13

Under Ninth Circuit law, courts employ a two-part test to determine if works are substantially similar: an intrinsic test and an extrinsic test.14 The intrinsic test is a subjective comparison of the total concept and feel of the two works, whereas the extrinsic test is an objective comparison of specific expressive elements which seeks to find “articulable similarities between the plot, themes, dialogue, mood, setting, pace, characters, and sequence of events in two works.”15 As was the case here, a court may dismiss a complaint on a 12(b)(6) motion for failing to satisfy the extrinsic test “because a jury may not find substantial similarity without evidence on both the extrinsic and intrinsic tests.”16

Because access was not in dispute and plaintiffs alleged that defendants read or viewed the Off Season materials, the court further applied the inverse ratio rule to plaintiffs’ claims.17 In so doing, the court “require[s] a lower standard of proof of substantial similarity when a high degree of access is shown.”18 Even under this liberal inverse ratio rule, plaintiffs failed to state a claim of copyright infringement because the alleged similarities between the protected elements of the works were not actual similarities that could result in a finding of substantial similarity under the extrinsic test.19

3. No Similarities Found Between the Actual Objective Details of the Works

The court engaged in a detailed analysis of plot, setting, characters, theme, mood, dialogue, pace and other miscellaneous alleged similarities between Ballers and the Off Season and held that the protectable elements of the works are significantly different.20 By filtering out and disregarding non-protectable elements, the inquiry was “whether the protectable elements, standing alone” were substantially similar.21

Plaintiffs argued that when determining whether Ballers is substantially similar to the Off Season, the court must consider the Ballers script and disregard the television series.22 The court rejected this argument because “published works cause injury under copyright law, [therefore] courts consider the final version of a film, rather than unpublished scripts, when determining substantial similarity.”23

Consequently, upon comparison of the Ballers television series and the Off Season materials that were distributed to defendants, the court found only a few actual similarities between the works, all of which were not protectable expression: (1) the stories are set entirely during professional football’s off season; (2) NBH and Strasmore are both well-dressed football players who are sexually promiscuous, drive fancy cars, and have a cocky attitude; and (3) the basic plot premise is a story about football players during the football off season.24 Even NBH and Strasmore’s respective Latina love interests were held to be “stock characters,” not subject to copyright protection because they were not “sufficiently delineated and especially distinctive.”25

4. Takeaways

Procedurally, the result of defendants’ motion to dismiss provides a powerful message for IP litigators: without specific allegations of extrinsic, objective similarities in copyrightable expression between competing works, a claim for copyright infringement is subject to dismissal with prejudice.26 Plaintiffs’ complaint suffered from overarching generalities with respect to articulable similarities. Moreover, the court considered all the specific documents and materials referenced in the complaint, even though they were not attached to it, without converting defendants’ 12(b)(6) motion into a summary judgment motion.27 This resulted in a comprehensive diagnosis of the content comprising the Off Season and Ballers story line in more than one format at an early stage in the proceedings. Even under a liberal inverse ratio standard, plaintiffs’ complaint failed to state a claim because copyright law “protects expression of ideas, not the ideas themselves,” stock scenes and themes “are not protected against copying.”28

Whether on the offense or the defense, the distinct similarities of a copyrighted work should either be alleged with specificity on the one hand, or articulated with sufficient detail to show no substantial similarity on the other.
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1 Everette Silas, et al. v. Home Box Office, Inc., et al., No. CV 15-9732-GW(FFMx), 2016 U.S. Dist. LEXIS 107944, at *57 (C.D. Cal. July 25, 2016).
2 The court noted that although subject of four separate copyrights, it would discuss the Off Season as a whole on defendants’ motion to dismiss. However, the court conducted a separate evaluation of the treatment, screenplay, trailer, and 10 minute trailer in determining that the Off Season is not substantially similar to Ballers. Id. at n. 7.
3 Id. at *7.
4 Id. at *2-4.
5 Id. at *7.
6 Id. at *27-28.
7 Id. at *34-36.
8 Id. at *10, 23-24.
9 Id. at *26.
10 Id. at *23-24.
11 Id. at *26.
12 Feist Publ’ns, Inc. v. Rural Tel. Servs. Co., 499 U.S. 340, 361 (1991).
13 Cavalier v. Random House, Inc., 297 F.3d 815, 822 (9th Cir. 2002).
14 Id. at *22-23 (citing Cavalier, 297 F.3d at 822).
15 Cavalier, 297 F.3d at 822 (citing Kouf v. Walt Disney Pictures & Television, 16 F.3d 1042, 1045 (9th Cir. 1994)).
16 Home Box Office, Inc., 2016 U.S. Dist. LEXIS 107944, at *20-23 (quoting Kouf, 16 F.3d at 1045).
17 Id. at *22-23.
18 Three Boys Music Corp. v. Bolton, 212 F.3d 477, 485 (9th Cir. 2000).
19 Home Box Office, Inc., 2016 U.S. Dist. LEXIS 107944, at *23-24.
20 Id. at *53-54.
21 Cavalier, 297 F.3d at 822 (quotations omitted) (emphasis in original).
22 Home Box Office, Inc., 2016 U.S. Dist. LEXIS 107944, at *14.
23 Id. at *14-15 (citing Meta-Film Assocs., Inc. v. MCA, Inc., 586 F.Supp. 1346, 1360 (C.D. Cal. 1984)).
24 Id. at *35-36, 41, 49
25 Id. *42-44.
26 See, e.g., Gilbert v. New Line Prods., Inc., No. CV 09-02231 RGK, 2009 U.S. Dist. LEXIS 130675, at *21 (C.D. Cal. Nov. 16, 2009) (dismissing plaintiff’s claim with prejudice after determining there was no substantial similarity because “no additional facts would allow [plaintiff] to prevail in her case”).
27 Id. at *13-14 (citing Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005).
28 Cavalier, 297 F.3d at 823 (citing Berkic v. Crichton, 761 F.2d 1289, 1293 (9th Cir. 1985)).

New Cancer Immunotherapy Pilot Program at the Patent Office

The United States Patent and Trademark Office (“USPTO”) recently announced the “Cancer Immunotherapy Pilot Program,” (“CIPP”) which will provide FREE accelerated examination for cancer immunotherapy patent applications. i   The goal of the program is to complete examination of an application within 12 months of qualifying for the program. ii

To qualify for the program, the application must be a non-provisional, non-reissue utility application with at least one claim directed to a method of ameliorating, treating, or preventing malignancy in a human subject wherein the steps of the method assist or boost the immune system in eradicating cancerous cells.iii  The claims are limited to twenty claims with no more than three independent claims.  The request must be filed before the issuance of any Office Action (including those with just a restriction requirement) or with a request for continued examination.  The program is slated to end on June 29, 2017; however, it may be extended or added as a permanent program as we have seen happen with other pilot programs.iv

One practical benefit of using this program is the potential increase in patent term extension (“PTE”).v  PTE extends the term of a patent beyond the 20 year limit to compensate patent owners for lost patent term due to pre-market approval requirements before a regulatory agency.vi  PTE only applies to the time from when a patent issues to when regulatory approval is granted.  Thus, the earlier your patent issues, the more potential PTE.

Another practical benefit of using this program is the increased value that an issued patent brings to a potential investor.  Issued patents are a commodity that can be licensed, enforced, traded, or contributed to a patent pool.  Pending patent applications are not.  Having an issued patent within one year as opposed to the standard three to five years may make all the difference in the success of a start-up company.

If you would like more information on the Cancer Immunotherapy Pilot Program or patent term extension, please contact Kathryn Hull or Susan Meyer of the Intellectual Property Practice Group at Gordon Rees Scully Mansukhani.

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[i] See Federal Register notice on 6/29/2016 (https://www.federalregister.gov/articles/2016/06/29/2016-15533/cancer-immunotherapy-pilot-program#page-42328)

[ii] Examination is complete upon the issuance of a final Office Action or Notice of Allowance

[iii] For example, this can include the administration of cells, antibodies, proteins, or nucleic acids that invoke an active (or achieve a passive) immune response to destroy cancerous cells. The Pilot Program also will consider claims drawn to the co-administration of biological adjuvants (e.g., interleukins, cytokines, Bacillus Comette-Guerin, monophosphoryl lipid A, etc.) in combination with conventional therapies for treating cancer such as chemotherapy, radiation, or surgery. Claims to administering any vaccine that works by activating the immune system to prevent or destroy cancer cell growth are included. The Pilot Program also will consider in vivo, ex vivo, and adoptive immunotherapies, including those using autologous and/or heterologous cells or immortalized cell lines.

[iv] Pilot programs that have been extended or made permanent include the After Final Consideration program, the Patent Prosecution Highway program, the Quick Path Information Disclosure Statement program, and the First Action Interview program.

[v] 35 U.S.C. § 156

[vi] Agencies include the Food and Drug Administration and the U.S. Department of Agriculture

Federal Circuit Clarifies “On Sale” for Purposes of 102(b)

On February 11, 2016, the Federal Circuit, sitting en banc, issued a precedential opinion in The Medicines Company v. Hospira, Inc., in which it clarified the meaning of “on sale” for purposes of 102(b). According to the Federal Circuit, to be “on sale,” a product “must be the subject of a commercial sale or offer for sale,” and that “a commercial sale is one that bears the general hallmarks of a sale pursuant to Section 2-106 of the Uniform Commercial Code.”1

The Dispute

Hospira had submitted two Abbreviated New Drug Applications (“ANDAs”) seeking FDA approval to sell bivalirudin – the generic form of Angiomax – before the expiration of two patents owned by The Medicines Company (“MedCo”).  MedCo sued Hospira, alleging that Hospira’s two ANDA filings infringed its patents. In response, Hospira asserted several grounds of invalidity. In one of these arguments, Hospira argued that the invention had been sold or offered for sale more than one year before MedCo had filed for patent protection.  Hospira contended that the on-sale bar was triggered when MedCo paid Ben Venue Laboratories (“Ben Venue”) to manufacture Angiomax before the critical date.2 Hospira also contended that the on-sale bar was triggered because MedCo offered to sell Angiomax produced according to the patents to its distributor, ICS, before the critical date.3

The District Court Decision

Applying the two-step framework of Pfaff v. Wells Electronics, Inc., 525 U.S. 55 (1998), the district court found that the Angiomax Ben Venue had manufactured for MedCo did not trigger the on-sale bar. Pfaff’s two-step framework requires that the claimed invention was (1) the subject of a commercial offer for sale; and (2) ready for patenting.4 While the district court concluded that the claimed invention was ready for patenting under the second prong of Pfaff – because MedCo had developed two enabling disclosures prior to the critical date, or, alternatively, reduced the invention to practice before the critical date – the court found that the first prong of Pfaff was not met because the claimed invention was not commercially offered for sale prior to the critical date. The district court agreed with MedCo that the transactions between MedCo and Ben Venue were sales of contract manufacturing services in which “title to the Angiomax always resided with MedCo.”5 Because the Angiomax made by Ben Venue were for “validation purposes,” the court held that they were not made for commercial profit, thereby avoiding the on-sale bar. The court also held that MedCo’s distribution agreement with ICS did not constitute an invalidating sale as the agreement was merely “an agreement for ICS to be the sole U.S. distributor of Angiomax.”6

The Appellate Decision

On appeal, Hospira’s argument concerning the application of the on-sale bar focused on whether the invention was the subject of a commercial offer for sale. Hospira took issue with the district court’s conclusion that no commercial sale or offer for sale had occurred. According to Hospira, “any transaction that provides a commercial benefit to the inventor is enough to trigger the on-sale bar.”7 In agreeing with Hospira, a three-judge panel of the Federal Circuit reversed the district court’s ruling regarding the applicability of the on-sale bar. Although the panel acknowledged that Ben Venue had invoiced the sale as manufacturing services and title to the pharmaceutical batches did not change hands, it disagreed with the district court’s conclusion that Ben Venue’s sale of services did not constitute a commercial sale of the claimed product. According to the panel, “where the evidence clearly demonstrated that the inventor commercially exploited the invention before the critical date, even if the inventor did not transfer title to the commercial embodiment of the invention,” the on-sale bar applies.8

En Banc Rehearing

On rehearing en banc, the Federal Circuit began by tracing the history of the on-sale bar. For many years the Federal Circuit had used a “totality of circumstances” standard in applying the on-sale bar. Under that test “no single finding or conclusion of law [was] a sine qua non” to a holding that the statutory bar arose.9 Rather, courts were to consider all the facts and circumstances surrounding any particular transaction in light of the policies underlying section § 102(b). Although a “definite offer for sale” was required, the Federal Circuit had found that this did not necessarily require commercial activity that rose to the level of a formal “offer” under contract law principles.10 This changed with Pfaff, when the Supreme Court replaced the “totality of the circumstances” test – which the Court noted had been criticized as “unnecessarily vague” – with a two-pronged test: § 102(b) applies when, before the critical date, the claimed invention (1) was the subject of a commercial offer for sale; and (2) was ready for patenting.11 Since Pfaff, the Federal Circuit has applied this two-part test without balancing the various underlying policies according to the totality of the circumstances.

The Federal Circuit has previously stated that “the question of whether an invention was the subject of a commercial sale or offer for sale … [should] be analyzed under the law of contracts as generally understood.12 In doing so, the Federal Circuit has said that a court should focus on those activities that would be understood to be commercial sales and offers for sale “in the commercial community.”13 And, as a general proposition, “we will look to the Uniform Commercial Code (‘UCC’) to define whether . . . a communication or series of communications rises to the level of a commercial offer for sale.”14 After Pfaff, “[t]he transaction at issue must be a ‘sale’ in a commercial law sense,” and that “[a] sale 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.”15

Applying § 102(b) in light of Pfaff, the Federal Circuit concluded that the transactions at issue between MedCo and Ben Venue did not constitute commercial sales of the patented product. According to the court, “the mere sale of manufacturing services by a contract manufacturer to an inventor to create embodiments of a patented product for the inventor does not constitute a ‘commercial sale’ of the invention.”16 Rather, the transaction must be one in which the product is “on sale” in the sense that it is “commercially marketed.”17 Further, the Federal Circuit explained that “stockpiling” by the purchaser of manufacturing services is not improper commercialization under § 102(b).18

The Federal Circuit offered three reasons for its conclusion: “(1) only manufacturing services were sold to the inventor – the invention was not; (2) the inventor maintained control of the invention; and (3) ‘stockpiling,’ standing alone, does not trigger the on-sale bar.”19 According to the court, Ben Venue acted as a pair of “laboratory hands” to reduce MedCo’s invention to practice in accordance with its instructions.20 The court noted that Ben Venue’s invoices for the manufacturing service stated, “Charge to manufacture Bivalirudin lot.”21 Moreover, the absence of title transfer further underscored that the sale was only of Ben Venue’s manufacturing services. Because Ben Venue never held title, “it was not free to use or sell the claimed products or to deliver the patented products to anyone other than MedCo, nor did it do so.”22 The Federal Circuit found the absence of title transfer significant “because, in most instances, that fact indicates an absence of commercial marketing of the product by the inventor.”23

Like the absence of title transfer, the Federal Circuit also considered the confidential nature of the transactions a factor weighing against the conclusion that the transactions were commercial in nature. In this case, the Federal Circuit found that the scope and nature of the confidentiality imposed on Ben Venue “supports the view that the sale was not for commercial marketing purposes.”24 Further, the Federal Circuit explained that stockpiling, “when not accompanied by an actual sale or an offer for sale of the invention, [is] mere pre-commercial activity in preparation for future sale.”25 According to the court, “the on-sale bar is triggered by actual commercial marketing of the invention, not by preparation for potential or eventual marketing.”26

In expressly overruling inconsistent language in prior decisions, the Federal Circuit took pains to note that it still does not recognize a blanket “supplier exception” to what would otherwise constitute a commercial sale.27 Although the fact that a transaction is between a supplier and inventor “is an important indicator that the transaction is not a commercial sale, it is not alone determinative.”28 According to the court, “the focus must be on the commercial character of the transaction, not solely on the identity of the participants.”29  In concluding its opinion, the Federal Circuit concisely restated its holding: “a contract manufacturer’s sale to the inventor of manufacturing services where neither title to the embodiments nor the right to market the same passes to the supplier does not constitute an invalidating sale under § 102(b).”30

Analysis

The Federal Circuit’s holding in this case provides important guidance in preserving the right to patent inventions to those whose development efforts involve contract manufacturing. While a wide variety of different industries employ contract manufacturers, they are commonly used by the pharmaceutical industry and especially by virtual and specialty pharmaceutical companies. For such companies, preserving the right to seek patent protection is essential. As a result, the lack of clarity as to how relationships with contract manufacturers should be structured can have devastating effects. But by applying the guidance now provided by the Federal Circuit, contract manufacturers may be used with greater confidence that patent rights will not be lost.

In order to benefit from this guidance, those who rely on the services of contract manufacturers should ensure that their agreements with such manufacturers recite the purchase of manufacturing services – not the goods themselves. Such agreements should also require confidentiality and should make clear that the contract manufacturer neither takes title to the goods it makes nor has the right to freely market such goods. By employing such terms and restrictions, transactions with contract manufacturers should not be viewed as commercial sales that trigger the on-sale bar of § 102(b).

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1 Meds. Co. v. Hospira, Inc., 2016 U.S. App. LEXIS 12667, at *3 (Fed. Cir. 2016).
2 Id. at *10.
3 Id.
4 Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 67-68 (1998).
5 Meds. Co., 2016 U.S. App. LEXIS 12667, at *12.
6 Id. (quoting Meds. Co. v. Hospira, Inc., 2014 U.S. Dist. LEXIS 43126, at *38 (D. Del. 2014).
7 Id. at *14.
8 Id. at *15 (quoting Meds. Co. v. Hospira, Inc., 791 F.3d 1368, 1370-71 (Fed. Cir. 2015).
9 Lacks Indus. v. McKechnie Vehicle Components USA, Inc., 322 F.3d 1335, 1347 (Fed. Cir. 2003).
10 Lacks Indus., 322 F.3d at 1347 (citing RCA Corp. v. Data Gen. Corp., 887 F.2d 1056, 1062 (Fed. Cir. 1989)).
11 Pfaff, 525 U.S. at 67-68.
12 Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1047 (Fed. Cir. 2001).
13 Id.
14 Id.
15 Trading Technologies International, Inc. v. eSpeed, Inc., 595 F.3d 1340, 1361 (Fed. Cir. 2010).
16 Meds. Co., 2016 U.S. App. LEXIS 12667, at *25-26.
17 Id. at *26.
18 Id.
19 Id.
20 Id. at *29.
21 Id. (emphasis in original).
22 Id. at *30.
23 Id. at *32.
24 Id. at *34.
25 Id. at *36.
26 Id.
27 Id. at *43.
28 Id.
29 Id. at *44.
30 Id. at *46-47.

Is the Enfish Case “A New Hope” For Software Patents?

Since the Supreme Court’s Alice¹ decision in 2014, the courts have found many software patents to be invalid as simply being “abstract ideas.” The Patent Office has also been rejecting many new software patent applications as being abstract ideas. Such Patent Office rejections are coming both at the initial examination stage and under various post-grant review systems. Many software patent owners have been feeling rather defeated and frustrated at the odds they have been facing.

A new hope may have arisen. On May 12, 2016, a three-judge Federal Circuit panel offered much needed good news for software patent holders in the case of Enfish LLC v. Microsoft². The issue (as seemingly always for software patents) was whether the claims were patent eligible subject matter under S.101.

The Court held the claims to be patentable subject matter, and this was particularly important since Enfish, the patent applicant, simply claimed a “self-referential” database. There was no physical structure claimed. However, the Court held that this non-physical structure was not simply an abstract idea. The Court in Enfish stated: “[w]e do not read Alice to broadly hold that all improvements in computer-related technology are inherently abstract…”

To date, a common strategy among patent practitioners when writing software patent applications has been to try to claim a physical component of the surrounding computer system or otherwise try to make the claims look as “physical” or as “structural” as possible in an attempt to slip through Alice’s fingers.

Importantly, the Court found that the claims were directed to an improvement to computer functionality versus being directed to an abstract idea. The Court was both influenced by claim language and evidence in the patent’s detailed description that the claimed self-referential table functions differently than a conventional database. The specification described the specific advantages of faster search times, smaller memory requirements and improved flexibility in database configuration. Basically, the Court was convinced that the claimed database structure functioned differently from existing database structures. Moreover, the advantages all related to solving longstanding software problems. Notably, the described advantages were all technical solutions to computer problems.

Therefore, the takeaway from Enfish for patent drafters is that the specification can be as important as the claims. To the greatest degree possible, the specification should explain how the software invention improves the functioning of the overall computer system in which it operates.

The Court also noted that “fundamental economic and business practices are often found to be abstract ideas.” Therefore, it appears to be important to patentablility to not present claims where a general purpose computer is simply being added to a fundamental economic practice or a mathematical equation. The Court had no appetite for these sorts of claims.

Two days later, the Court in TLI Communications LLC v. AV Automotive³ invalidated software claims to a system of organizing digital images. The Enfish case was distinguished with the Court stating that the claims in TLI were not directed to a specific improvement in computer functionality. The Court pointed out that the “specification fails to provide any technical details for the tangible components”. In addition, the Court held that the claims were not directed to a “solution to a technical problem”. Instead, the claims simply described “physical components [that] behave exactly as expected according to their ordinary use.”

On May 19, 2016, the Patent Office issued a Memo4 to its examiners discussing both the Enfish and TLI cases. The Memo stated that the Enfish decision did not change the framework for determining subject matter eligibility, but instead provided “additional clarity” for identifying abstract ideas.

The Memo seemed to raise the bar for discarding software patents as simple abstract ideas. Specifically, it instructed examiners to first identify the abstract idea in the claim and then why it is considered to be abstract. Examiners should also explain their reasoning by reference to previous judicial decisions. The Memo also warned examiners against making sweeping, overbroad statements and requested that they consider the Applicants’ rebuttals.

The Memo urges examiners to look at “the character as a whole” of the claims, as opposed to dissecting the claims. As such, a claim is not doomed simply because it runs on a general-purpose computer. The Memo specifically notes that software can improve computer technology just as much as hardware can. Therefore, an examiner can determine that a claim is not an abstract idea without having to look at additional elements that would confer patentability in the two-part Alice test5. Importantly, the Memo urged examiners to look at the teachings of the specification. It also reminded them that an improvement does not need to be defined by “physical” components. The Memo stated that TLI only referred to “generalized steps to be performed on a computer”, and that is why it was not patentable.

So where does this leave us now?

When writing patent applications, one should focus the claims on the improvements to the computer functionality itself. Both the claims and the specification should preferably be directed to specific improvements to the way computers operate.

Patentable claims are not required to have a physical hardware component. A data structure may be all the “structure” that is required for patentability. That is the good news. However, one should always avoid claims of undue breadth. Also, the writing of the specification was very important in Enfish. A minimalistic specification that merely describes how the claims are enabled, or simply describes what the claims mean is to be avoided. Instead, the specification should be drafted to list advantages of the invention and show how the claimed software structure makes a computer system operate better. The specification is the place to tell a story. Tell a story about the benefits of the invention. Simple claims to business methods performed on computers with the computer operating in an ordinary capacity are still likely to be rejected.

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1 http://www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf
2 http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/15-1244.Opinion.5-10-2016.1.PDF
3 http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/15-1372.Opinion.5-12-2016.1.PDF
4 http://www.uspto.gov/sites/default/files/documents/ieg-may-2016_enfish_memo.pdf
5 The Alice case which established a two-step test for patent eligibility, being: (1) determine if a patent-ineligible concept (i.e., law of nature, natural phenomena, or abstract idea) is claimed; and if so, (2) determine whether additional claim elements transform the claim into a patent-eligible application.

Notice Requirements for Employers Under The Defense of Trade Secrets Act

Trade secrets have historically been protected by a patchwork of various state statutes. With the passage of the Defense of Trade Secrets Act (DTSA) on May 11, 2016, trade secrets now have uniform protection under federal law by a powerful set of enforcement tools that can be used in federal court nationwide. The DTSA also grants whistleblower immunity to those who disclose trade secrets to the government for the purpose of reporting suspected illegal conduct.

The DTSA imposes an obligation on employers to notify all employees and contractors that they are entitled to whistleblower immunity. This notice must be provided in every contract with an employee or contractor that governs the use of a trade secret or other confidential information. Applicable contracts may include employment applications containing contractual language, employment agreements, restrictive covenants, non-disclosure agreements, compensation agreements, separation agreements, BYOD agreements that contain confidentiality language, and confidentiality stipulations (entered in lieu of protective orders in court).

If an employer fails to provide the required notice, the DTSA precludes awards for exemplary damages or attorney’s fees in any action against an employee to whom notice was not provided. In view of the many eight- and nine-figure verdicts rendered in recent trade secret cases, this penalty can be substantial.

The DTSA does not articulate specifically what must be included in the notice. While more detail is better than less, anything short of a full verbatim recitation of all of the immunity provisions in the DTSA creates the risk that such notice will be challenged as insufficient. Accordingly, the only way for an employer to eliminate this risk entirely is to provide the complete text of the immunity provisions in the DTSA with every contract that governs the use of a trade secret or other confidential information.

In an apparent recognition of the difficulty of including all of the of the immunity provisions within the text of every such contract, the DTSA provides that employers will be considered in compliance with the notice requirement if they simply provide a “cross-reference” in such contracts to something it calls a “policy document.” According to the DTSA, this policy document must: (1) be provided to the employee or contractor (presumably concurrently with the execution of the contract or agreement); and (2) set forth the employer’s whistleblower policy.

While an employer’s option of only referencing a policy document relieves the burden of including lengthy notice provisions in every agreement, it sheds no light on the what must be included in that document. Ideally, a detailed policy document should identify which individuals are protected, what conduct is protected, and should provide instructions on how to report possible violations of law to appropriate authorities. But, as with providing such notice in contracts themselves, anything less than a complete recitation of the immunity provisions of the DTSA carries risk. Thus, the safest course for an employer to take in crafting its policy document would be to include the entirety of the immunity provisions of the DTSA.

Recommendations

There are several things employers can do to ensure compliance with the DTSA notice requirements, and to minimize the risk of losing the ability to recover exemplary damages and attorney’s fees in future trade secret litigation:

  • Review and update all agreements with employees and contractors which reference confidentiality to ensure that appropriate language is included in all of such agreements going forward.
  • Create a DTSA policy document to be given to every employee and contractor with every contract which references confidentiality.
  • Require all suppliers, vendors, and any other contractors whose employees have access to trade secrets or confidential information to provide appropriate notice to their employees.
  • Verify compliance with the DTSA notice requirements by having counsel review all standard contracts and company policy documents to make sure they contain the required language.

The Rise of Federal Trade Secret Protection

It is done. President Obama signed into law the Defend Trade Secrets Act of 2016 (“DTSA”), the nation’s first federal trade secret protection act with civil remedies. The DTSA is effective May 12, 2016 for any misappropriation (as defined in the statute) “for any act which occurs on or after the date of the enactment of this Act.”

The DTSA does not preempt states’ trade secret laws; those state laws remain in effect. Accordingly, there is no requirement that a party even allege a DTSA claim when pursuing a trade secret action. Strategic consideration must be given to bringing a DTSA claim and the impact on jurisdiction. A plaintiff that prefers litigating in state court may wish to forego adding a DTSA cause of action to the lawsuit because doing so would create a federal question. If a state court lawsuit alleges a DTSA claim, the defendant may remove the case to federal court.

Remedies under the DTSA include damages for the loss caused by the misappropriation, damages for unjust enrichment, and injunctive relief for any actual or threatened misappropriation. If a plaintiff can establish that the trade secret was “willfully and maliciously appropriated,” the court can award exemplary damages of up to two times the amount of actual damages. For bringing a claim, reasonable attorney’s fees may also be awarded to the prevailing party, as well as to a defendant if the claim of misappropriation is made in bad faith.

Once an afterthought, trade secrets were the last of the four major types of IP—patent, copyright, trademark, and trade secret—recognized by the courts, and the basic elements of the tort of trade secret misappropriation have been recognized since only the late 1800s and early 1900s.¹ However, as we reported here, the number of trade theft continues to rise, and by one metric, doubled between 1995 and 2004. Until now, trade secrets were the only major type of intellectual property not backed by U.S. federal civil remedies to compensate owners for theft.

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¹ Catherine L. Fisk, Working Knowledge: Trade Secrets, Restrictive Covenants in Employment, and the Rise of Corporate Intellectual Property, 1800–1920, 52 HASTINGS L.J. 441, 441 (2000)