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.

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.

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.

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).

_______________________________________________________________________

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.

______________________________________________________________________

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.

A Lasting Impression: Federal Circuit Credits Own Precedent More Than Recent Supreme Court Authority

In Lexmark International, Inc. v. Impression Products, Inc.,1 the Federal Circuit declined to follow the Supreme Court’s recent decisions in Quanta Computer, Inc. v. LG Electronics, Inc.2 and Kirtsaeng v. John Wiley & Sons, Inc.,3 but instead affirmed its long-standing precedent allowing limits on the post-sale use or resale of patented goods and held foreign sales of patented goods do not exhaust the patentee’s rights in the United States.

These questions arose in a dispute between Lexmark, the manufacturer of printers and ink cartridges, and Impression Products, the operator of a refurbished ink cartridge business. Lexmark manufacturers and sells two types of ink cartridges, a full-priced model that includes no use restrictions and a discounted model that limits the consumer’s right to refill and reuse the cartridge. Impression collects the used cartridges—both full-priced and discounted models—and modifies the hardware, allowing them to be reused, then imports and resells them in the United States.

1. Post-Sale Use Limits

In the first portion of its opinion, the Federal Circuit held a patentee’s single-use or no-resale restrictions were permissible limitations on the otherwise presumptive “patent exhaustion” doctrine.4 Specifically, the Court allowed the sales, so long as they were “made under a clearly communicated, otherwise-lawful restriction[.]”5 The Federal Circuit relied heavily on its decision in Mallinckrodt, Inc. v. Medipart, Inc.,6 which paved the way for patentee “single use” restrictions, in part because of the Patent Act’s explicitly grant of a “right to exclude.”7

In reaching its conclusion, the Federal Circuit also declined to follow the Supreme Court’s decision in Quanta.8 The Court noted that Quanta only addressed the sale of patented goods by a manufacturing licensee, not sales by the patentee, “[a]nd the patentee’s authorization to the licensee to make (the first) sales was not subject to any conditions, much less conditions to be embodied in those sales.”9 As such, it did not address a situation where, as here, the sale as made subject to a use restriction. Accordingly, Quanta did not hold an “authorized sale” exhausted patent rights because it, in fact, did not involve any limitations on the buyer’s use. The Quanta decision also implicitly rejected petitioner and amici’s requests that Mallinckrodt be overturned.10

Ultimately, the Federal Circuit rejected the notion that any sale, even when rights are expressly restricted, qualifies as an “authorized sale of a patented item terminat[ing] all patent rights to that item.”11

2. Foreign Sales and U.S. Patent Rights

Next, the Federal Circuit moved to square its decades-old decision in Jazz Photo v. ITC12 with the Supreme Court’s recent decision in Kirtsaeng, and decide if Lexmark’s foreign sales—made without an explicit reservation of U.S. patent rights—granted authorization to import and sell those goods in the United States.13 At the outset, the Court was clear to acknowledge that Jazz Photo held U.S. patent rights are exhausted by a first sale, but only when that initial sale is in the United States.14 Thus, the present situation—where disputed products were sold outside the United States, modified, then imported and sold in the U.S.—was not covered.

The focus then turned to reconciling Kirtsaeng, with the Federal Circuit first noting how patent rights are necessarily different from those granted by copyright.15 The Patent Act, for example, specifically grants a patentee the exclusive right to make, use, sell, or import goods covered by the patent, while no such exclusive right exists the copyright. Therefore, Kirtsaeng was limited because it relied, quite explicitly, on the text of the Copyright Act.16 Although the Copyright Act allows certain actions “without the authority of the copyright owner,” a patent grants its owner broad rights “to exclude.” Accordingly, the Federal Circuit strictly construed the decision, determining “Kirtsaeng is not controlling in this case.”17

Ultimately, patent exhaustion is territorial because “what the statute expressly provides to a U.S. patentee is the reward available from the right to exclude ‘in the United States.’”18 In support of this textual anchor, the Court explained how “American markets differ substantially from markets in many other countries” and, thus, foreign sales of patented goods are inherently different from their domestic counterparts.19 The unauthorized importation of patented articles sold abroad therefore constitutes infringement, because foreign sales do not amount to authority for “the buyer to import the article and sell and use it in the United States.”

3. Implications

Initially, it will behoove all patentees looking to implement post-sale restrictions to use explicit language, but the limitations will only apply to their domestic sales. Next, patentees are urged to keep globalization considerations in mind, but only in so far as foreign customers may be looking to import patented goods purchased abroad. In this regard, other factors may strongly influence the discussion, such as where the first sale actually occurred (i.e. was it domestic or abroad). Finally, caution is warranted for those engaged in foreign transactions because, despite the comprehensive analysis, the Federal Circuit did not address the question of whether U.S. rights may be exhausted by a licensed foreign sale as there was no such licensee before the Court.

__________________________________________________________________________________________

1 Nos. 14-1617, 14-1619, 2016 U.S. App. LEXIS 2452 (Fed. Cir. Feb. 12, 2016)
2 553 U.S. 617 (2008)
3 133 S. Ct. 1351 (2013)
4 Lexmark Int’l, Inc., 2016 U.S. App. LEXIS 3452, at *31-32.
5 Id. at *32.
6 976 F.2d 700 (Fed. Cir. 1992)
7 Lexmark Int’l, Inc., 2016 U.S. App. LEXIS 3452, at *31-40.
8 Id. at *36-40.
9 Id. at *37 (citing Quanta Comp., Inc., 553 U.S. at 636-37) (emphasis in original).
10 Id. at *40.
11 Id. at *41-42.
12 264 F.3d 1094 (Fed. Cir. 2001)
13 Lexmark Int’l, Inc., 2016 U.S. App. LEXIS 3452, at *80-82.
14 Id. at *82-85.
15 Id. at *86-89.
16 Id. at *89 (quoting Kirtsaeng, 133 S. Ct. at 1370) (noting the Supreme Court “stressed that it was determining ‘the best reading of [15 U.S.C.] § 109(a).”) (emphasis in original).
17 Id. at *98.
18 Id. at *98 (quoting 35 U.S.C. §§ 154(a)(1), 271(a)).
19 Id. at *100-03.

For Whom the Bell Tolls: The End of Rule 84 (and Form 18 Patent Pleading Standards)

December 1, 2015 marked the end of Rule 84 of the Federal Rules of Civil Procedure and the use of Forms, including various litigation documents, such as summonses, complaints, and answers in civil actions. Rule 84 was enacted in 1937 and simply stated, “The forms contained in the Appendix of Forms are intended to indicate, subject to the provisions of these rules, the simplicity and brevity of statement which the rules contemplate.” Rule 84 was amended in 1946 and 2007 to its current language, “The forms in the Appendix suffice under these rules and illustrate the simplicity and brevity that these rules contemplate.” But all good things must eventually come to an end. On April 29, 2015, the Supreme Court signed an order abrogating Rule 84, effective December 1, 2015.

Rule 84 and its Forms assisted many parties to bring suit under a simplified pleading as exemplified in Form 18. Using Form 18, a patent holder wishing to file a suit for direct patent infringement only needed to identify the infringing party, the infringed patent, the infringing device, and provide statements of jurisdiction and patent notice. Many have argued against the sufficiency of Form 18 based on the standard set out in Bell Atl. Corp. V. Twombly[1] and Ashcroft v. Iqbal.[2] Under Twombly and Iqbal, the Supreme Court held that to “survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”[3] Further, “a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”[4]

Nevertheless, the sufficiency of Form 18 has been upheld by the Court of Appeals for the Federal Circuit in K-Tech Telecommunications, Inc. v. Time Warner Cable, Inc.[5] and In re Bill of Lading Transmission and Processing System Patent Litigation.[6] Specifically, the Federal Circuit stated in those cases that “a proper use of a form contained in the Appendix of Forms effectively immunizes a claimant from attack regarding the sufficiency of the pleading,”[7] and “to the extent the parties argue that Twombly and its progeny conflict with the Forms create differing pleadings requirements, the Forms control.”[8] This double standard has allowed a patent holder to file a “bare bones” complaint through the use of Form 18 and use discovery to fill in the details. While most “bet the company” litigation probably would not rely on a bare bones infringement complaint, the simplified pleadings benefitted smaller companies or solo inventors who did not have the same resources as larger companies. The abrogation of Rule 84 may make it more difficult and expensive for a small company / solo inventor to bring a suit against an infringer, perhaps even making it impossible.

With the abrogation of Rule 84 and subsequently Form 18, the default patent pleading standard will be the standard set out in Twombly and Iqbal. However, the amount and type of factual matter needed to allow the court to draw the “reasonable inference” or “plausibility” for liability remains unclear. Prior to K-Tech and Bill of Lading, the district courts already varied in their pleading standards.  For example, the District Court for the Central District of California in Medsquire LLC v. Spring Medical Systems Inc., et al.[9] dismissed a Form 18 complaint for failing to recite any facts as to how the accused device infringed the patent. The court stated, “a complaint must contain sufficient factual matter to make its allegations plausible.” Furthermore, the court in Medsquire alluded to a different standard required for pleadings drafted by attorneys as opposed to pleadings drafted by pro se plaintiffs.[10] In contrast, the District Court for the Eastern District of Texas in Traffic Information, LLC v. Yahoo! Inc.[11] held that “Twombly and Iqbal have not affected the adequacy of complying with Form 18.” Yet, even after K-Tech and Bill of Lading, the District Court for the Eastern District of Virginia in Macronix International Co. Ltd. v. Spansion Inc.[12] dismissed a complaint for failing to meet the Twombly and Iqbal standards. The Macronix Court stated:

[B]efore filing a complaint, counsel must ascertain exactly what claims should alleged to be infringed and how they are infringed. That can be done with brevity and clarity if counsel know at the outset their theories of infringement and what can, and cannot, be said about allegedly infringing conduct.  That, in turn, may well, indeed likely will, require expert assistance. And, it will mean taking great care when crafting a succinct, but sufficient, patent complaint. But, that is not asking too much. Indeed, it is high time that counsel in patent cases do all of that work before filing a complaint.[13]

Additionally, the Federal Circuit in K-Tech alluded to a “sliding scale” standard based on the complexity of the case. Specifically, the K-Tech Court stated, “[t]he adequacy of the facts pled depends on the breadth and complexity of both the asserted patent and the accused product or system and on the nature of the defendant’s business activities.”[14] This opens the door for the Courts to implement their own standards. For example, the standard could vary depending on the technology field, claim type (e.g. composition, device, or method), or number of infringed claims. Some Courts could require infringement charts or other detailed analysis of the alleged infringement.

The patent pleading standards under Twombly and Iqbal in the aftermath of Rule 84’s abrogation will undoubtedly take years, if not decades, to develop. Until then, it would be prudent to do a little more homework before filing your patent infringement complaint, especially if you are filing in districts where the heightened pleading standards of Twombly and Iqbal have been applied to patent infringement complaints.


[1] Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).
[2] Ashcroft v. Iqbal, 556 U.S. 662 (2009).
[3] Id. at 663.
[4] Id.
[5]K-Tech Telecommunications, Inc. v. Time Warner Cable, Inc., 714 F.3d 1277 (Fed. Cir. 2013).
[6] In re Bill of Lading Transmission and Processing System Patent Litigation, 681 F.3d 1323 (Fed. Cir. 2012).
[7] K-Tech, 714 F.3d at 1283.
[8] In re Bill of Lading, 681 F.3d at 1334.
[9] Medsquire LLC v. Spring Medical Systems Inc., et al., Case No. 2:11-cv-04504-JHN-PLA, Order granting Motion to dismiss, (C.D. Cal. August 31, 2011).
[10] Id. at 5. The Court stated, “McZeal dealt with a narrow circumstance, which is not at issue here: a lawsuit brought by a pro se plaintiff, who the Federal Circuit held to ‘less stringent standards than formal pleadings drafted by lawyers.’”
[11] Traffic Info., LLC v. Yahoo! Inc., Case No. 2:09-CV-246-TJW-CE, Magistrate Judge Report and Recommendation (E.D. Tex. Apr. 13, 2010).
[12] Macronix International Co. Ltd. v. Spansion Inc., 4 F. Supp. 3d 797 (E.D. Va. Mar. 10, 2014).
[13] Id. at 803.
[14] K-Tech, 714 F.3dat 1287.

Trade Dress and the Functionality Doctrine

The Fourth Circuit in McAirlaids Inc. v. Kimberly-Clark Corp., held this year that ownership of a utility patent does not necessarily preclude a claim in trade dress rights, particularly where the patent does not specifically cover the asserted trade dress.

This decision is of importance as it reviewed the Supreme Court’s holding in TrafFix Devices, Inc. v. Marketing Displays, Inc., stating that the presence of a utility patent is strong evidence of functionality, thus defeating a trade dress claim.

McAirlaids filed suit in the Western District of Virginia against Kimberly-Clark for trade dress infringement and unfair competition after Kimberly-Clark started using a similar pattern on one of its products.

The Fourth Circuit reversed the district court’s decision granting summary judgment after it found that McAirlaids had presented sufficient evidence to create genuine factual question as to whether its selection of pattern was purely an aesthetic choice among other options the company had considered.

The Circuit Court held that the existence of a utility patent is only one of several factors that the district court should have considered in evaluating the functionality of the dot pattern. Unlike TrafFix, where the dual-spring mechanism at issue was not registered as a trade dress, in the present case the pinpoint dot pattern allegedly infringed was subject to trade dress federal registration, thus shifting the burden to defendant to show functionality by preponderance of evidence.  Another distinguishable element is that the utility patent held by McAirlaids does not mention the specific dot pattern as a protected feature.

This latest decision on the subject shows that the crossroads of trademarks and patents are as interesting as ever, and that many different factors may ultimately determine the fate of a trade dress.

Routine Patent Litigation Giving Rise to Antitrust Liability

On Aug. 6, in Tyco Healthcare Group LP v. Mut. Pharm. Co., Case No. 2013-1386, the Federal Circuit looked at whether antitrust liability can arise from routine patent litigation and suggested that a patent owner can face antitrust liability resulting from bringing patent infringement claims and administrative petitions.

In Tyco, the patent owner of a drug, Tyco Healthcare Group, filed a claim for patent infringement against a generic drug manufacturer, Mutual Pharmaceutical Co., after Mutual filed an application with the Food and Drug Administration (FDA) to manufacture and sell a generic version of Tyco’s drug.  In response, Mutual filed antitrust counterclaims against Tyco.

In 2009, the district court entered a judgment of non-infringement and the following day, Tyco filed a Citizen Petition with the FDA urging the FDA to change the criteria for evaluating the bioequivalence of the proposed generic product to ensure therapeutic equivalence of the generic drug to the brand name drug.  Ultimately, the FDA approved Mutual’s application to manufacture and sell the generic drug and denied Tyco’s Citizen Petition.

Mutual moved for summary judgment on its antitrust counterclaims against Tyco, arguing Tyco was not immune from liability.  The district court held Tyco was not liable for antitrust violations as alleged by Mutual, however, on appeal, the Federal Circuit vacated the district court’s ruling in part and remanded it for further consideration as to whether Tyco’s patent infringement claim and Citizen Petition were shams.

Ordinarily, a party is exempt from antitrust liability for bringing a lawsuit against a competitor under the Noerr-Pennington doctrine.  This doctrine is not limited to just lawsuits, but can also apply to administrative petitions.  There is an exception to immunity for sham litigation.  In determining whether litigation is a “sham,” a court will look at objective and subjective elements: (1) the litigation must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits; and (2) the litigation must be motivated by a desire to interfere directly with the business relationships of a competitor.

In its decision, the Federal Circuit concluded that Tyco may not be immune from antitrust liability because there are issues of factual dispute as to whether Tyco’s patent infringement claim was objectively baseless and whether the Citizen Petition was objectively baseless and intended to interfere with the FDA approving Mutual’s application to manufacture and sell the drug.

So what does this mean for patent enforcement?  There is concern that the Federal Circuit has inserted antitrust liability into patent litigation, which could result in antitrust penalties for routine patent enforcement.  Further, the case could have a possible chilling effect on patentees’ communications with administrative agencies, such as the filing of a Citizen Petition with the FDA.  However, because the Noerr-Pennington doctrine continues to live, patentees are still protected unless the party alleging antitrust violations can present facts to show the litigation activity was a sham.