IP Update, Vol. 15, No. 5, May 2012

Patents

Supreme Court: Generic Drug Manufacturers Have Counterclaim Right to Correct Improper Use Codes

Supreme Court of Texas to Federal Circuit: Don’t Mess with Texas but Feel Free to Mess with Texas Patent Attorneys; SCOTUS May Weigh In on “Arising-Under” Jurisdiction

In Court, Secondary Considerations Must Be Considered Before Making an Obviousness Determination

FDA Labels and Method Claims Must Be in Sync, or ANDA Infringement Is Sunk

**WEB ONLY** Second ANDA Filer Has Jurisdiction in Declaratory Judgment Action

Federal Circuit Affirms Structural Obviousness Analysis

The Newest Federal Circuit Judge on Claim Construction: A Clear Nod Toward Intrinsic Evidence

Privilege Cannot Shield Discovery of Settlement Negotiations

When the PTO Shows Sound Basis for Believing Two Products Are the Same, It Is the Applicant’s Burden to Show They Are Not

**WEB ONLY** Inherency Revisited

Consolidation in Multi-Defendant Patent Infringement Cases: Or How I Learned To Live with the AIA

For Recapture, Look to the Change of Scope Between the Original Application Claims And the Reissue Claims

**WEB ONLY** Guidance on Construing Claim Construction, a.k.a. Diminutive Claim Construction

**WEB ONLY** Pre-AIA Patent Infringement Filings Still Subject to Mis-Joinder Rules

**WEB ONLY** Rule 9(b) Applies to False Marking Claims

Trademarks

I’ll Drink to That! (Trade Dress)

**WEB ONLY** Fashion Fakes: No Counterfeit Burberrys® Allowed Here

Copyrights

How Deep Is the Safe Harbor?

Fact Issues Preclude Summary Judgment in Fabric Design Infringement Suit

Supreme Court to Decide Application of First Sale Doctrine to Foreign-Made Copyrighted Works

Trade Secrets

Ex-Employee Escapes Economic Espionage Act

Patents / Hatch-Waxman

Supreme Court: Generic Drug Manufacturers Have Counterclaim Right to Correct Improper Use Codes

by William (Bill) Gaede

The U.S. Supreme Court has now addressed for the first time the scope of a statutory provision authorizing generic drug companies to counterclaim in Hatch-Waxman litigation against a branded company to correct or delete patent information submitted to the U.S. Food and Drug Administration (FDA) and listed in the Orange Book. The Supreme Court unanimously held that a generic drug company has the statutory right to counterclaim against a branded company to force correction of a “use code” provided to the FDA that inaccurately describes the brand’s patent as covering a particular method of using a drug. Caraco Pharmaceutical Laboratories v. Novo Nordisk, Case No. 10-844 (Supr. Ct., April 17, 2012) (Kagan, J.) (Sotomayor, J., concurring).

By way of background, as part of the branded company receiving approval to market its drug, it must list in the FDA’s Orange Book its composition and method of using patents that it contends cover the drug and its uses approved for sale by the FDA. The branded company is required to identify the patents by their number and dates of expiration and to provide to the FDA a short description of the subject matter that a method of use patent covers. This short description is known as a “use code,” and the FDA does not attempt to ascertain their accuracy.

Under the Hatch Waxman Act, a generic drug company may submit an Abbreviated New Drug Application (ANDA) seeking approval to market a generic version of a branded company’s approved drug before a patent expires. It may do so in two ways. First, it may certify that it will market a drug for uses not covered by the brand’s patents, see 21 U.S.C. § 355(j)(2)(A)(viii), and propose a product label that will “carve out” any still patented method of use. (This approach is called a “skinny label.”) Second, a generic drug company may directly challenge the patent under a “Paragraph IV” certification by stating that its intended label does not infringe the Orange Book listed patents and/or such patents are invalid.

The FDA is prohibited from approving a drug for a use that would infringe a method-of-use claim and relies on the use code description to assess whether the generic’s proposed label would overlap in someway with the use code. If so, FDA will not approve the application. Thus, the breadth of the use code may determine whether the FDA approves or not an ANDA for a particular use(s).

In this case, Novo Nordisk had received FDA approval for three uses of its branded diabetes drug repaglinide. Novo’s method patent, however, covered only one use of the drug, namely to treat diabetes in combination with metformin. Caraco originally submitted a Paragraph IV certification to sell its generic version of repaglinide for all approved uses, and Novo filed suit. Caraco then submitted a “skinny label” under Paragraph viii and proposed a label carving out Novo’s patented use of repaglinide with metformin. Novo then changed its use code consistent with a change in its label to indicate that it held a patent on all three approved uses of repaglinide. As a result, FDA would not grant Caraco the right to market its generic version of repaglinide for the two non-patented uses because the proposed skinny label overlapped with the now-broader use code.

Caraco filed a statutory counterclaim under 21 U.S.C. § 355(j)(C)(ii)(I). Congress had enacted the counterclaim provision in 2003 in response to apparent evidence that some branded companies were exploiting the statutory scheme to prevent or delay the marketing of generic drugs. This included one case where a branded company had listed a patent in the Orange Book that covered neither the compound nor the use of the drug.

Construing the statue, the district court granted summary judgment to Caraco, enjoining Novo from correcting its overbroad use code description as it relates to its method patent. Caraco appealed to the U.S. Court of Appeals for the Federal Circuit, which reversed, finding that the statute did not authorize the counterclaim, because at least one use described in the use code was in fact patented. (See IP Update, Vol. 13, No. 5; Vol. 13, No. 8.)

The Supreme Court has now reversed. Writing for the Court, Justice Kagan found that two provisions in the statute required construction. First, the Court was required to construe when “a patent does not claim . . . an approved method of using” a drug. Second, the Court was required to decide whether the submission of the use code information constituted the “content of patent information submitted” pursuant to the Orange Book listing requirements.

Addressing the first issue, the Court reasoned that “context matters.” Determinative, the Court found, were the 2004 Hatch-Waxman Amendments to authorize FDA to approve a generic drug for unpatented uses. “The statutory scheme, in other words, contemplates that one patented use will not foreclose marketing a generic drug for other unpatented ones.” Thus, a company “may bring a counterclaim to show that a method of use is unpatented because establishing that fact allows the FDA to authorize a generic drug via section viii.”

Having resolved the first question against Novo, the Court went on to address whether a branded company’s use code did constitute “patent information” submitted by the brand “under” § 355 to the FDA. The Court read “under” broadly and found that use codes are “pivotal” to the FDA’s implementation of the Hatch-Waxman Amendments, because the FDA relies on the use codes to assess whether any patent covers a particular method of use.

Finally, the Court rejected Novo’s argument that Congress established the counterclaim only to address the specific problem of when a branded company improperly lists a patent in the Orange Book and remanded the case for further proceedings consistent with the opinion.

Practice Note: The Caraco decision is significant because it broadly confirms the statutory counterclaim right of a generic drug manufacturer to seek correction of a branded company’s patent information submitted as part of the Orange Book listing process. Also, if a branded company were to submit an overbroad use code, that potentially may trigger antitrust issues as well. Nonetheless, the facts of the decision are somewhat unique, and it is unclear whether this decision will trigger significant counterclaim litigation over use codes. Certainly, it will be good practice for a branded company to carefully consider the use code language it submits as part of the patent information supplied to FDA.

Patents / Jurisdiction

Supreme Court of Texas to Federal Circuit: Don’t Mess with Texas but Feel Free to Mess with Texas Patent Attorneys; SCOTUS May Weigh In on “Arising-Under” Jurisdiction

by Adam Auchter Allgood and Paul Devinsky

In a 5-3 decision, the Supreme Court of Texas, while specifically stating that it is not bound by the holdings of the U. S. Court of Appeals for the Federal Circuit, has relied on the Federal Circuit opinions in Immunocept (IP Update, Vol. 10, No. 10) and Air Measurement (IP Update, Vol. 14, No. 8) in determining that the federal courts possesses exclusive jurisdiction for state malpractice claims “arising-under” underlying patent matters. Minton v. Gunn, 355 S.W.3d 634, 653 (Supr. Ct. Tex., Dec. 16, 2011) (Green, J.) (Guzman, J., dissenting, joined by Medina, J. and Willett, J.). This decision is now at the U.S. Supreme Court as the subject of a petition for cert.

Minton is only one of a series of cases to explore the “arising under” jurisdiction of the Federal Circuit. The statute 28 U.S.C. §1338, which provides the federal courts with exclusive jurisdiction for any civil action “arising under” federal law relating to patents, has come under extensive scrutiny lately by the Federal Circuit. In several cases in which attorney malpractice was alleged in connection with patent procurement or enforcement, Circuit Judge O’Malley has taken the opportunity to present her views on the limits of the jurisdiction of the Federal Circuit to hear such disputes which are grounded in state law. For example, Judge O’Malley has dissented from the dismissal of a petition seeking an en banc review of the 2010 precedential Federal Circuit opinion in Davis v. Brouse McDowell, L.P.A. (see IP Update, Vol. 13, No. 3), which found federal jurisdiction over a legal malpractice action involving missed deadlines in which no patent actually issued. Recent cases in which Judge O’Malley has aired her view on this jurisdictional issue include the following:

• Memorylink Corp. v. Motorola, Inc., Case No. 10-1533 (Fed. Cir., April 11, 2012) (per curiam order) (O’Malley, J., dissenting from the denial of the petition for rehearing en banc)
• Minkin v.Gibbons, P.C., Case No. 11-1178 (Fed. Cir., May 4, 2012) (Reyna, J. (O’Malley, J., concurring in the result and conceding that under controlling Federal Circuit case law, the Federal Circuit is compelled to hear the case; but explaining why, in her view, it is not “proper” to do so)
• Landmark Screens, LLC v. Morgan, Lewis, & Bockius, LLP, Case No. 11-1297 (Fed. Cir., April 23, 2012) (Clevenger, J.) (O’Malley, J., concurring and urging en banc consideration of the jurisdictional issue)
• Byrne v. Wood, Herron & Evans, LLP, Case No. 11-1012 (Fed. Cir. March 22, 2012) (per curiam) (O’Malley, J., concurring in the Court’s opinion on the malpractice claim that address the issue on appeal, while noting that controlling Federal Circuit authority “compels us to do so”; but also pointing out the "federalism considerations" that mitigate against doing so)
• USSPS, Ltd. v. Avery Dennison Corp., Case No. 11-1525 (Fed. Cir., April 17, 2012) (per curiam) (O’Malley, J., joined by Mayer, J., concurring while voicing what she regards as “significant” federalism concerns that are raised by the Federal Circuit’s exercise of jurisdiction over “these purely state laws claims”)

While Judge O’Malley, a former federal district judge who presided over more than 100 patent and trademark cases, continues to follow the binding Federal Circuit Davis precedent, it is clear that she feels that it is an incorrect application of Supreme Court case law. Both state and federal courts are applying the four-part standard enumerated by the Supreme Court in 2005 in Grable, 545 U.S. 308, for the general “arising-under” jurisdiction of §1331 to the specific patent section of §1338. In Judge O'Malley's view federal question jurisdiction, as discussed in Grable, exists if resolving a federal issue is necessary to resolution of the state-law claim; the federal issue is actually disputed; the federal issue is substantial; and federal jurisdiction will not disturb the balance of federal and state judicial responsibilities.

Malpractice cases involving patents usually are one of two varieties involving either patent prosecution errors or non-asserted defenses during infringement litigation. Judge O’Malley tends to disagree with the application of the third Grable factor since most of the issues underlying malpractice claims are case-specific, factual inquiries and require only application, not interpretation of federal patent law and would have little or no bearing on other cases. As to the fourth factor, Judge O’Malley asserts that malpractice cases do not implicate any underlying patent rights themselves. Any patent issue that is decided will only inform the state law standards of causation or damages and would not have binding effect on other patent cases.

The majority in Minton (as well as controlling Federal Circuit case law) however, rely on the argument that a “case within a case” exists in malpractice claims, since patent issues must be analyzed in order for the plaintiff to prove a proximate causal connection that the harm or loss would not have occurred without the attorney’s malpractice. The Minton Court (like Federal Circuit precedent) is based on the rational that litigants benefit from judges who are familiar and experienced with complicated patent rules and that there is a strong federal interest in the uniform application of patent laws.

Practice Note: With the Texas Supreme Court decision in Minton currently teed up before the U.S. Supreme Court, Judge O’Malley may find her desired Federal Circuit en banc review bypassed as the issue may receive direct consideration by the Supreme Court. Certiorari briefs are currently being filed with the Supreme Court (Docket No. 11-1118). On April 26, Memorylink also filed a petition for cert to the Supreme Court drawing on Judge O’Malley’s dissent in Memorylink v. Motorola, arguing that by asserting jurisdiction on state law malpractice claims, the Federal Circuit is disturbing the appropriate balance between state and federal courts.

Patents / Obviousness

In Court, Secondary Considerations Must Be Considered Before Making an Obviousness Determination

by Cynthia Chen, Ph.D.

In reversing a district court’s finding of obviousness, the U.S. Court of Appeals for the Federal Circuit held that there is no burden-shifting framework for determining obviousness and that a fact-finder must consider secondary considerations before making an obviousness determination. Eurand Inc. v. Mylan Pharmaceuticals Inc. (In re Cyclobenzaprine Hydrochloride Extended-Release Capsule Patent Litigation), Case Nos. 11-1399; -1409 (Fed. Cir., Apr. 16, 2012) (O’Malley, J.).

The plaintiffs are the owner and exclusive licensee of two patents that cover an extended-release formulation of cyclobenzaprine, a muscle relaxing drug marketed as Amrix. The defendants filed Abbreviated New Drug Applications (ANDAs) for generic versions of Amrix, with Paragraph IV certifications alleging that the patents were invalid. In a bench trial, the district court held that the claims were obvious in view of the immediate-release formulation of cyclobenzaprine. In particular, the district court found that the claimed extended-release pharmacokinetic (PK) profile is “bioequivalent” to the immediate-release PK profile. The district court concluded that bioequivalence alone was sufficient to support a finding of obviousness. While the plaintiffs offered objective evidence of secondary considerations, including failure of others and long-felt need, the district court held that it was co-plaintiff Cephalon’s burden to disprove the initial finding of obviousness. The plaintiffs appealed.

The Federal Circuit reversed, noting that the record established that a skilled artisan did not know the pharmacokinetic /pharmacodynamic relationship even for the immediate-release formulation. Thus, the Federal Circuit concluded that there was no way to match the dosage for the extended-release formulation to achieve a known therapeutic effect. Moreover, the Court found that the prior art gave no indication of which parameters were critical nor direction as to which of many possible choices was likely to be successful. The Court concluded there could be no finding of obviousness absent a finding that the prior art would have taught or suggested a therapeutically effective formulation.

Furthermore, the Federal Circuit held that the district court erred by making its finding of obvious before it considered the objective evidence of secondary considerations. The district court adopted a legal framework in which the party challenging the validity of patent first proves a “prima facie” case of obviousness based on the patent and relevant prior art; then the prima facie case is “rebutted” by the patentee based on objective considerations. The Federal Circuit held that such a burden-shifting framework “controverted this court’s precedent requiring that a fact finder consider all evidence relating to obviousness before finding a patent invalid on those grounds,” and improperly shifted the burden of persuasion to the patentee. Instead, a fact finder must withhold judgment on an obviousness challenge until all relevant evidence has been considered collectively. Objective factors should not be characterized as “after-the-fact considerations” or relegated to “secondary status.”

Practice Note: In a footnote, the Federal Circuit explained that “[u]nlike in district court litigation, a burden-shifting framework makes sense in the prosecution context,” because the framework furnishes a “procedural tool of patent examination, allocating the burdens of going forward as between examiner and applicant.” Litigation, however, differs significantly from the examination process, and courts should not apply the burden-shifting framework for invalidity determinations.

Patents / ANDA / Method-of-Use Patents

FDA Labels and Method Claims Must Be in Sync, or ANDA Infringement Is Sunk

by Clifford R. Lamar II (Dale)

The U.S. Court of Appeals for the Federal Circuit recently held that filing a Paragraph IV certification for an Orange Book listed method-of-use patent was not an act of infringement when an NDA holder’s FDA-approved labeling did not include an indication for every use limitation in the asserted Orange Book patent. Bayer Schering Pharma AG v. Lupin, Ltd, et al., Case Nos. 11-1143; -1228 (Fed. Cir., Apr. 16, 2012) (Bryson, J.) (Newman, J., dissenting).

In 2010, the defendants submitted ANDAs to market a generic form of Bayer’s Yasmin® oral contraceptive. The defendants filed Paragraph IV certifications for each of the three Orange Book listed patents, but Bayer brought suit alleging infringement under § 271(e)(2)(A) for only one of those patents. Both independent claims of the patent essentially require a method of achieving simultaneous contraceptive, anti-androgenic and anti-aldosterone effects in a female patient in need thereof. The FDA-approved label provides an indication of safe and effective use of the drug “for oral contraception.”

The district court granted the defendants’ motions for judgment of non-infringement on the pleadings because FDA had not approved the three simultaneous uses of the drug. The district court reasoned that infringement under § 271(e)(2)(A) for a method-of-use patent could only occur if the FDA had approved the use claimed in the patent under the patent-holder’s NDA. Here, Bayer’s NDA labeling only provided an indication for use as an oral contraceptive, but mentioned the other two effects in a separate section. Bayer appealed.

Judge Bryson, writing for the majority, affirmed the district court and its reasoning. The Court rejected Bayer’s arguments and purported evidence that the FDA had actually approved all three uses claimed in the patent due to observed anti-androgenic and anti-aldosterone effects being discussed in the label. First, the Court found that FDA labeling regulations made clear that Yasmin® was not approved for anti-androgenic and anti-aldosterone effects because there was no recommendation or suggestion for safe and effective administration of the drug for these purposes. Second, the Court found that Bayer’s evidence was insufficient to prove that the FDA approved all three simultaneous uses, let alone in female patients in need thereof. To the contrary, the majority concluded that even the declaration testimony of a former FDA official only showed that the contraceptive use was “approved,” while the other effects were listed in the label merely as “pertinent” to human use.

Judge Newman, in dissent, opined that the majority and the district court failed to subject Bayer’s claims to a “standard infringement analysis.” According to Judge Newman, whether the generic would infringe is a question of fact that “cannot be resolved on pleadings by adverse inference or assumption.”

Patents / Declaratory Judgment Jurisdiction

Second ANDA Filer Has Jurisdiction in Declaratory Judgment Action

by K. Nicole Clouse, Ph.D.

The U.S. Court of Appeals for the Federal Circuit upheld a finding of subject-matter jurisdiction in a declaratory judgment action brought by a generic, even though the brand drug manufacturer had provided the generic with a covenant not to sue on one of the brand’s Orange Book patents. Dey Pharma, LP and Dey Inc. v. Sunovion Pharmaceuticals, Inc., Case No. 11-1507 (Fed. Cir., April 16, 2012) (Dyk, J.).

Hatch-Waxman Regulatory Framework

To market a new drug, a brand manufacturer must obtain approval for its New Drug Application (NDA) from the U.S. Food and Drug Administration (FDA). The brand must also list all patents covering the drug in a publication called the Orange Book (OB). To bring a generic to market, a generic company must file an Abbreviated New Drug Application (ANDA) including one of several possible certification statements. If the generic files its ANDA with a paragraph IV certification (i.e., that the Orange Book patents are invalid or will not be infringed), the ANDA may be approved unless the brand sues the generic within 45 days.

The first ANDA filer containing a paragraph IV certification receives a 180-day market exclusivity period from the date of its “first commercial marketing,” but this exclusivity period is forfeited if the generic fails to launch within 75 days of a final court judgment that the asserted OB patents are invalid or not infringed.

The FDA will approve later-filed ANDAs only after the expiration of the first ANDA filer’s 180-day exclusivity period. Thus, it is in the best interest of later ANDA filers for the 180-day period to occur as early as possible.

This framework has led to a phenomenon called “parking,” in which brands and first ANDA filers sometimes settle their patent disputes prior to a final judgment on invalidity or non-infringement of the OB patents, usually by granting the generic a license or paying the generic to stay off the market. Notably, without a final judgment, the 180-day exclusivity period is not triggered, thereby keeping later ANDA filers off of the market until the patents expire.

Later ANDA filers, however, can trigger the first ANDA filer’s 180-day exclusivity period by securing a final judgment of invalidity or non-infringement on the OB patents that had been asserted against the first ANDA filer.

To prevent later ANDA filers from triggering the first ANDA filer’s exclusivity period, brand manufacturers sometimes sue later ANDA filers on only a subset of OB listed patents, holding others in “reserve.” Such action means that a final judgment on invalidity or non-infringement can be reached for only the subset of OB listed patents and not on the reserved patents. Without a final judgment on the reserved patents, the first ANDA filer’s 180-day exclusivity period cannot be triggered. Congress addressed this situation by allowing ANDA filers to bring declaratory judgment actions to seek a declaration relating to the validity or infringement of reserved patents.

Dey Lives Another Day

The present case involves a declaratory judgment action brought by the second ANDA filer (Dey) against the brand manufacturer (Sunovion, formerly Sepracor) in order to trigger the 180-day exclusivity period of the first ANDA filer (Breath Ltd.).

In June 2005, Breath filed its ANDA with a paragraph IV certification for all three OB patents listed for Sunovion’s drug Xopenex. Sunovion sued Breath for infringement of all three patents, but the parties settled in 2008 before any final judgment was entered. The settlement agreement granted Breath a license to sell generic Xopenex starting August 20, 2012.

In July 2005, Dey filed a second ANDA with a paragraph IV certification for all three OB patents. Sunovion sued Dey for infringement of the two earlier-expiring patents, but did not assert the later-expiring patent. Dey brought a declaratory judgment action to obtain a declaration that the later-expiring patent is invalid or not infringed by either Dey’s or Breath’s generic product. Sunovion then granted Dey a covenant not to sue on the subject patent and moved to dismiss the declaratory judgment action for lack of subject-matter jurisdiction. The parties stipulated as to non-infringement, and the district court entered a final judgment in favor of Dey. Sunovion appealed on jurisdictional grounds.

Sunovion argued that there was no subject-matter jurisdiction because success in the declaratory judgment action was insufficient to redress Dey’s injury, since Dey would still need to succeed in its suit involving the other two OB patents. The Federal Circuit court rejected Sunovion’s argument, saying that “a favorable declaratory judgment for Dey . . . will eliminate the potential for that patent to exclude Dey from the market.” In particular, if Dey succeeds on the declaratory judgment action as to the later expiring patent, Breath’s 180-day exclusivity period would be triggered in the event that Dey also succeeds in its suit as to the other two OB patents. If Dey cannot bring the declaratory judgment action (or does not succeed), success in its suit as to the other two OB patents would not trigger Breath’s 180-day exclusivity period, and Dey would be kept off the market until either Sunovion’s later expiring patent expires, or until a final judgment on invalidity or non-infringement is entered as to all three OB patents.

Sunovion further argued that, as a practical matter, the litigation over the other two OB patents could not possibly be concluded before Breath’s permitted launch date of August 20, 2012, and that once Breath is permitted to launch, there will no longer be a case or controversy to support the declaratory judgment action. The Federal Circuit rejected this argument, pointing out that “[e]ven after Breath is entitled to launch, the possibility remains that Breath will not do so.” The Court further explained that, “[i]f Breath chooses to delay triggering its 180-day exclusivity period, Dey and other generics could potentially be kept off the market until expiration of the [later expiring] patent in 2021, absent a judgment of noninfringement or invalidity.”

The Court concluded by pointing out that the party arguing that a case has become moot has the burden of providing sufficient information to prove mootness, and that Sunovion did not meet that burden.

Patents / Obviousness

Federal Circuit Affirms Structural Obviousness Analysis

by Christopher L. May

The U.S. Court of Appeals for the Federal Circuit, in addressing the standard for establishing when a chemical compound is obvious based on prior art compounds, reiterated its two-part framework earlier established in Takeda Chemical Industries, Ltd. v. Alphapharm Pty., Ltd. (see IP Update, Vol. 10, No. 7). Otsuka Pharmaceutical Co., Ltd. v. Sandoz Inc. et al., Case Nos. 11-1126; -1127 (Fed. Cir., May 7, 2012) (Lourie, J.)

The chemical compound at issue, aripiprazole, is a carbostyril compound used as an antipsychotic and marketed under the trade name ABILIFY®. The defendants argued that aripiprazole was obvious based on any one of three proposed lead compounds—an “unsubstituted butoxy” carbostyril, a “2,3-dichloropropoxy” carbostyril, and a “2,3-dimethylpropoxy” carbostyril. After a bench trial, the district court found that the asserted prior art would not have led one of ordinary skill to select any of the three compounds as a lead compound for further antipsychotic research. Sandoz appealed.

On appeal, the Sandoz argued that the district court’s lead compound analysis was the sort of “rigid analysis” that had been precluded by the Supreme Court’s decision in KSR v. Teleflex (see IP Update, Vol. 9, No. 10). Noting that proof of structural obviousness under Takeda requires a demonstration that one of ordinary skill in the art would have selected the proposed lead compound for further development and that the prior art would have supplied one of ordinary skill with reason to modify the lead compound into the claimed compound with a reasonable chance of success, the panel found that KSR did not compel alteration of the test.

The Court then turned to the three compounds offered by the defendants as lead compounds. For the “unsubstituted butoxy” compound, the Court found that the prior art would have suggested a different, structurally dissimilar compound, to use as a starting point. For the “2,3-dichloropropoxy” compound, the Court agreed with the district court that the defendants’ argument used impermissible hindsight analysis. Finally, for the “2,3-dimethylpropoxy” compound, the Court found that while the evidence did suggest that it could be used as a potential lead compound, there was insufficient evidence to suggest one of ordinary skill in the art would have modified it in such a manner as to make aripiprazole.

Patents / Claim Construction

The Newest Federal Circuit Judge on Claim Construction: A Clear Nod Toward Intrinsic Evidence

by Ryan N. Phelan

In his debut claim construction appearance at the U. S. Court of Appeals for the Federal Circuit, Judge Wallach (writing for a unanimous panel) focused his attention on intrinsic evidence as the primary tool for claim construction. Chicago Board Options Exchange, Inc. v. International Securities Exchange, LLC, Case Nos. 11-1267; -1298 (Fed. Cir., May 7, 2012) (Wallach, J.).

In the underlying case, International Securities Exchange (ISE) had appealed a district court summary judgment order granting non-infringement to the Chicago Board Options Exchange (CBOE). The patent-at-issue was directed to an automated exchange for the trading of financial options contracts that allocates trades among market professionals and that assures liquidity. On appeal, the Federal Circuit found error with the district court’s construction of three terms and provided its own constructions. In so doing, Judge Wallach provided a hint as to his possible modus operandi on claim construction.

The parties had agreed that the term “system memory means” was a means-plus-function limitation. Nevertheless, in a footnote, Judge Wallach sua sponte found the claim element to be means-plus-function because “the limitation articulates a function, but nowhere in the language of the limitation is there a specific and definite structure of a ‘system memory means.’” Turning to the parties’ dispute, Judge Wallach relied on the specification to find (and to dispute CBOE’s position to the contrary) that the disclosed “system memory” was corresponding structure clearly associated with the “system memory means” function.

The district court’s concluded that the claimed “matching” may be based on price only. The Federal Circuit disagreed, pointing to dependent claims “matching” could be based on “a pro rata basis” or on “an allocation formula.” The Federal Circuit also noted that specification supports a “time priority” basis for matching. The Court also relied solely on the claim language and the specification in resolving a related dispute as to whether “matching” and “allocating” were distinct. In doing so, the Court focused on the claim language and claim differentiation concepts, citing Federal Circuit precedent for the proposition that different terms presumptively convey different meanings.

The Court next concluded that the district court erred in determining that the claim term “automated exchanges” describes a “method.” The Court noting that “once again, the claims are instructive,” explained that the patent in issue contained both system and method claims. Thus, to construe the term “automated exchanges” as a method would render superfluous the method claims which themselves already explicitly recited as a method (or “process”)—a construction contrary to the Court’s claim differentiation jurisprudence. Again the Court turned the specification to bolster its position, showing that a system (and not just a method) was indeed disclosed—“[t]he specification also explains that: ‘[o]ver time, each of the existing options exchanges has developed systems to track the best quotation.’”

Practice Note: At least in this case, Judge Wallach consistently relied on intrinsic evidence alone to support claim constructions. He relied heavily on the claim language, supported by the specification, and once in a footnote, cited the file history. No apparent extrinsic evidence was relied upon.

Patents / Discovery

Privilege Cannot Shield Discovery of Settlement Negotiations

by Kevin P. Shortsle

The U.S. Court of Appeals for the Federal Circuit rejected the creation of a new settlement negotiation privilege and denied the plaintiffs’ petition for a writ of mandamus that sought to vacate a district court order compelling discovery of documents related to settlement negotiations. In re MSTG, Inc., Case No. 11-M996 (Fed. Cir., April 9, 2012) (Dyk, J.).

Plaintiff MSTG sued AT&T Mobility over patents covering third-generation mobile technology. During discovery, MSTG produced settlement agreements from another litigation granting third parties licenses to the patents asserted against AT&T, since the license agreements could be relevant to the calculation of a reasonable royalty for patent damages. However, MSTG refused to produce the underlying negotiation documents. AT&T moved to compel the production of communications between MSTG or its attorneys on the one hand and licensees on the other hand. Initially, the magistrate denied AT&T’s motion. AT&T then sought reconsideration of its motion based on MSTG’s damages expert relying on the settlement agreements as well as deposition testimony of an MSTG executive, who testified that there were business reasons for entering into the settlement agreements.

On reconsideration, the magistrate compelled MSTG to produce documents related to the settlement negotiations. The magistrate reasoned that the documents could contain information showing the expert’s grounds for reaching his opinions were erroneous, could shed light on why the parties reached their royalty agreements and could provide guidance on whether the licenses were relevant to calculating a reasonably royalty between AT&T and MSTG. The district court agreed and further found that it would be unfair for MSTG to shield the reasons for entering into the license agreements from AT&T when MSTG’s expert relied on this information. MSTG petitioned the Court for a writ of mandamus asking for the creation of a new settlement negotiation privilege and a finding that the district court abused its discretion.

The Federal Circuit denied MSTG’s petition for mandamus relief. At the outset, the Court dispensed with two threshold inquiries. First, the Court applied its own law related to discovery matters because the discovery sought related to an issue of substantive patent law—reasonable royalty and damages calculations for patent infringement. The Court then found that a writ of mandamus would be an appropriate remedy because even though it “is generally inappropriate to review discovery orders by mandamus,” the issue of settlement negotiations being privileged was a matter of first impression for the Court, an issue in which the district courts are split and the confidentiality of the settlement negotiation documents would be lost if review were denied until final judgment.

Nevertheless, the Court declined to create a new settlement negotiation privilege. The Court analyzed several factors identified by the Supreme Court in determining whether to adopt a new privilege under Fed. R. Evid. 501: state policy and recognition of the new privilege; congressional consideration of the new privilege or related issues; the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence; and whether the new privilege effectively advances the public good.

First, the Court found that no state has adopted or recognized a settlement negotiation privilege outside the context of a third party mediator.

Second, the Court analyzed the text and legislative history of Fed. R. Evid. 408, which allows the admissibility of settlement negotiation documents for any purpose other than proving liability or the amount of a claim or to impeach by a prior inconsistent statement or a contradiction. The legislative history made clear that the rule not only includes settlements and negotiations between the parties to a lawsuit but also third parties. Further, when enacting Rule 408, Congress did not take the step of creating a new settlement negotiation privilege.

Third, the settlement negotiation privilege was not on the list of evidentiary privileges created by the Advisory Committee in its proposed Federal Rules of Evidence.

Fourth, the Court found that while there is an important public interest favoring settlement of disputes, disputes are routinely settled without the benefit of a settlement privilege, and therefore a settlement negotiation privilege is not necessary to achieve settlement. In short, none of the factors identified by the Supreme Court supported creation of a new settlement negotiation privilege.

The Court also found that any settlement privilege would necessarily have numerous exceptions, effectively weakening the privilege and creating uncertainty and a lack of clarity surrounding the privilege. In the end, the Court concluded that Rule 26 provides an effective method to limit the scope of discovery with respect to settlement negotiations. The district courts have broad discretion to exercise control over the discovery process, can limit the discovery of settlement negotiations and provide appropriate protections or heightened standards for discovery of settlement negotiations. Even though the Court did not decide or identify limits to the discovery of settlement negotiations, the existence of such authority cut against the need for a new settlement negotiation privilege.

The Court then found that in this case the district court did not abuse its discretion in granting AT&T’s motion to compel discovery of the settlement negotiation documents. The Court reasoned that as a “matter of fairness MSTG cannot at one and the same time have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations.”

Practice Note: All parties should proceed with settlement negotiations knowing that such communications between the parties may be discoverable. The parties may want to minimize the amount of documents (e.g., emails, letters) exchanged during settlement negotiations and limit, when possible, substantive comments to oral discussions. Parties should also carefully consider whether to rely on the underlying settlement negotiations, rather than the four corners of the settlement agreements, when formulating their damages theories.

Patents / Inherency

When the PTO Shows Sound Basis for Believing Two Products Are the Same, It Is the Applicant’s Burden to Show They Are Not

by Cynthia Chen, Ph.D.

In affirming a decision of the U.S. Patent and Trademark Office (PTO) Board of Patent Appeals and Interferences’ (Board) finding of inherent anticipation, the U.S. Court of Appeals for the Federal Circuit held that once the examiner establishes that the prior art teaches “the same or substantially the same compound,” the burden of proof shifts to applicants to prove that either the claimed structures are different or that the claimed properties are not inherent in the prior art. In re Mousa, Case No. 11-1294 (Fed. Cir., Apr. 19, 2012) (Reyna, J.).

The application discloses a super-sulfated, oxidized heparin fraction. Heparin can prevent angiogenesis by inhibiting the activities of fibroblast growth factor 2 (FGF2). However, its use is limited because heparin is also an anticoagulant and can cause bleeding complications. The application discloses that oxidized heparin fractions fully inhibit FGF2-induced angiogenesis. Additionally, the bleeding complications normally associated with heparin can be eliminated by using these super-sulfated, oxidized heparin fractions because they possess weaker anticoagulant properties.

During prosecution, the examiner rejected several claims of the application as being inherently anticipated by the Naggi patent. The Naggi patent discloses treating heparin with a mixture of sulfuric acid and chlorosulfonic acid (both of which are strong oxidizing agents) to produce a super-sulfated heparin fraction that has weak anticoagulant properties. Subsequently, Mousa amended the claims to recite that the heparin fraction “fully inhibits fibroblast growth factor (FGF2) induced angiogenesis.” Mousa argued that the amended claims did not encompass all super-sulfated, oxidized fractions, but only those fractions with the FGF2-related property, a functional characteristic that the Naggi patent failed to disclose. Nonetheless, the inherent anticipation rejection was maintained by the examiner and affirmed by the Board. Mousa appealed.

The Federal Circuit agreed with the Board. The Federal Circuit concluded that there was a sound basis for the examiner to believe that treating heparin with the strong oxidizing agents necessarily results in oxidized heparin, and that the burden of proof was properly shifted to Mousa to show that those oxidizing agents did not oxidize heparin, as well as that the Naggi heparin fractions did not possess the same FGF2-inhibiting characteristics as claimed by Mousa. Mousa failed to satisfy this burden. While Mousa argued that oxidizing agents do not oxidize every substance and that the examiner did not establish that these chemicals can oxidize heparin, Mousa provided no proof to support of this argument. Further, the Court also dismissed Mousa’s argument that a finding of inherency requires “virtual identity” of the two products. Instead, the correct standard is that once the claimed and prior art products are found to be “substantially identical,” an applicant needs to prove that the prior art product does not necessarily or inherently possess the recited characteristics.

Practice Note: Once the PTO meets the “substantially identity” standard, the applicant has the burden of providing actual evidence of structural or functional dissimilarity. Attorney argument alone is not sufficient. Interestingly, in a child application (now US Patent 8,071,569), Mousa was able to distinguish Naggi by adding a claim limitation that “the percentage of hydroxyl residues of the heparin fraction [that] are oxidized is in a range of 25 percent to 100 percent,” because Naggi teaches away from increasing the percentage of oxidized hydroxyl residues beyond the level that is detectable by nuclear magnetic resonance (NMR).

Patents / Inherency

Inherency Revisited

by Robert H. Underwood

In affirming a decision of the U.S. Patent and Trademark Office (PTO) Board of Patent Appeals and Interferences (Board) decision that affirmed an examiner’s rejection of claims as being inherently anticipated, a divided panel of the U.S. Court of Appeals for the Federal Circuit reiterated that inherent anticipation requires enablement, but does not require that the inherent features are appreciated. In re Montgomery et al., Case No. 11-1376 (Fed. Cir., May 8, 2011) (Dyk, J.) (Lourie, J., dissenting).

The Montgomery patent application claimed a method for the treatment or prevention of stoke by administering to a person diagnosed as in need of such treatment or prevention an inhibitor of the rennin-angiotensin system (RAS). During examination of the application, the examiner finally rejected the claims as anticipated by each of four prior art references, including the HOPE reference. Each of the prior art references describe administering the drug ramipril, a known RAS inhibitor, to subjects who had known risk factors for stroke, such as hypertension. The HOPE reference described the design of a clinical study in which ramipril would be administered to more than 9,000 subjects “at high risk for cardiovascular events such as myocardial infarction and stroke.” The HOPE reference discloses that patients had received ramipril or placebo for at least one month as of the publication date.

The Board affirmed the examiner’s rejections finding that the claims had two elements: administering a RAS inhibitor, and to subjects diagnosed as requiring stroke treatment or prevention. According to the Board, both elements were met by the prior art administration of ramipril to subjects with hypertension and at risk of stroke. Montgomery appealed.

On appeal, the Court construed the claims as requiring 1) administering ramipril, 2) to subjects diagnosed as requiring stroke treatment or prevention, and 3) for the treatment or prevention of stroke. It then focused its analysis on the HOPE reference in light of the claims. Montgomery did not contest that elements 1 and 2 were met by HOPE, but urged that HOPE did not disclose actual performance of the claimed method because it did not disclose actual administration of ramipril in amounts that treat or prevent stroke.

The panel majority disagreed, stating that their precedent holds that anticipation requires enablement, not actual reduction to practice. In addition, the Court found that the actual administration of ramipril in the HOPE reference treated hypertension, a risk factor for stroke, and therefore HOPE inherently discloses stroke prevention even if it was not appreciated by the authors. A further factor was a concession at oral argument that the HOPE authors could have obtained the claims at issue based on their disclosure.

In dissent, Judge Lourie criticized the application of an “unbounded” concept of inherency that prevents patenting of inventions that were not known, used or benefited from. In his view, the keystone of inherency is that the claimed invention must have necessarily resulted from the practice of the prior art reference, and HOPE did not meet this standard.

Practice Note: The majority decision focused on whether the claimed method had been performed in the prior art and whether the results needed to be appreciated. In 2003 Judge Lourie similarly dissented in the denial of the petition for rehearing en banc in Schering Corp. v. Geneva Pharmaceuticals (see IP Update, Vol. 6, No. 8), cited by the majority that held inherent anticipation requires enabling disclosure but not actual performance and rejected the notion that inherent results must be appreciated in the prior art.

Patents / Litigation

Consolidation in Multi-Defendant Patent Infringement Cases: Or How I Learned To Live with the AIA

by Paul Devinsky

The U.S. Judicial Panel on Multidistrict Litigation (JPML) concluded that there is no conflict between the anti-joinder statute (§ 299) of the America Invents Act (AIA) and 28 U.S.C. § 1407, which provides for consolidated pretrial proceedings. In re Bear Creek Technologies, Inc., Case No. 2344 (JPML, May 2, 2012) (K.H. Vratil, Acting Chairman).

Bear Creek filed suit against 14 telecommunications companies, accusing each of infringement of patent. Bear Creek moved to centralize all claims for pretrial proceedings under 28 U.S.C. § 1407. Vonage Holdings opposed, arguing that § 299 of the AIA precludes the panel from centralizing the actions. Section 299 provides that accused infringers may not, based solely on allegations that they each have infringed the patent in suit, either be joined in one action as defendants or have their actions consolidated for trial. Bear Creek argued that § 299 does not apply to a request for pretrial centralization, in which the defendants are not joined in one action or consolidated for trial.

The JPML concluded that it was appropriate to centralize the actions for pretrial proceedings, finding that § 299 does not alter its authority to order pretrial centralization. The JPML looked to the plain meaning of the statutes, noting that while § 1407 applies to pretrial proceedings, § 299 focuses on consolidation for trial.

Mindful of Vonage’s argument that centralization could be used as an “end run” around the AIA’s joinder requirements, the JPML noted that centralization is not automatic but rather depends on the circumstances of each specific case. In this case, which the JPML characterized as a “close call,” it concluded that pretrial centralization of the 14 actions was appropriate because the actions share common questions of fact involving the infringement, validity and enforceability of the patent and will promote convenience and efficiency of the proceedings.

Practice Note: In this case the JPML found no conflict between § 299 of the AIA and 28 U.S.C. § 1407. It may be expected that many non-practicing entities will invoke Bear Creek in seeking pretrial consolidation in situations where several defendants are targeted in separate suits.

Patents / Reissue

For Recapture, Look to the Change of Scope Between the Original Application Claims And the Reissue Claims

by Aamer S. Ahmed

Vacating and remanding a decision by the U.S. Patent and Trademark Office (PTO) Board of Patent Appeals and Interferences (Board), the U.S. Court of Appeals for the Federal Circuit concluded that the Board did not properly apply the required recapture analysis in the rejection of the applicants’ reissue application for an electronic television programming guide. In reYouman et al., Case No. 11-1136 (Fed. Cir., May 8, 2012) (Prost, J.) (Lourie, J. dissenting).

Inventors Youman et al. original patent issued with a claim directed to “[a]n electronic programming guide . . . comprising . . . selection means for allowing said user to select a title for display . . . said selection means comprising means for causing each of said n characters to cycle forward and backward through a plurality of alphanumeric characters.” The claim phrase “cycle forward and backward” was added during prosecution. The applicants argued that the invention uses a remote control to “cycle” through the alphabet rather than using a keyboard to enter characters into a personal computer as taught by the prior art. Within the statutory two-year period, the applicants filed a reissue application with 21 new claims, alleging that the original claims were partly inoperative by reason of the patent claiming less than the applicants had a right to claim. The new claims replaced the phrase “cycle forward and backward” with claims reciting in pertinent part “[a]n electronic television programming guide . . . comprising . . . a wireless remote control, comprising nonalphanumeric keys . . . wherein a user may search for a title . . . by changing from a first character to a second characters using the nonalphanumeric key.” After the Board affirmed the examiner’s final rejection under § 251 as being directed to improperly recaptured subject matter previously surrendered, the applicants appealed, challenging whether the recapture rule prevented them from claiming “changing” as a selecting means in the reissue claims.

The Federal Circuit, citing to In re Mostafazadeh (see IP Update, Vol. 14, No. 5), applied the three-part recapture test, noting that there was no dispute regarding the first part of the test, i.e., that “the reissue claims are broader than the patented claims.” Turning to the second part of the recapture analysis, whether “the broader aspects of the reissue claims relate to surrendered subject matter,” the Court agreed with the Board that the surrendered subject matter was “any selecting means broader that the cycling limitation of the patented claim.”

The Court then focused on the third part of the recapture analysis, “whether the surrendered subject matter has crept into the reissue claim,” and determined that the Board “failed in several respects to apply this third step.” The Court found that broadening the patented claim from “cycling” to “changing” does not instantly implicate the recapture bar. The Court further concluded that the original application claim, not the patented claim, should be used as a frame of reference for determining whether the reissue claims materially narrows the claims. In the view of the majority of the panel, doing otherwise “would frustrate the remedial nature of the reissue statute and contradict case law.”

Patents / Claim Construction

Guidance on Construing Claim Construction, a.k.a. Diminutive Claim Construction

by Rose Whelan

Addressing the issue of construing language in a claim construction order (language not found in the claims), the U.S. Court of Appeals for the Federal Circuit reversed a finding of non-infringement based on incorrect claim construction. Advanced Fiber Technologies v. J & L Fiber Services, Case No. 11-1243 (Fed. Cir., April 3, 2012) (Lourie J.) (Dyk, J. dissenting-in-part).

The patented technology in this appeal involved screening devices used in the pulp and paper industry. The three independent claims of the asserted patent include the term “screening medium” or its synonym “screening plate.” The district court constructed “screening medium” as a “perforated barrier through which stock is passed to remove oversized, troublesome, and unwanted particles from good fiber.” At AFT’s request the district court also construed the term “perforated,” which appeared in this construction, but did not appear in the claims, as “pierced or punctured with holes.” Based on its construction, the district court granted summary judgment of non-infringement in favor of the defendant. AFT appealed.

On appeal, the Federal Circuit found that the district court incorrectly construed “perforated” and provided guidance on how to conduct what it called “derivative claim construction.” Although the Court noted that it does “not ordinarily construe words that are not in claim,” where such derivative construction of a non-claim term is required, courts must follow the guiding principles set forth in Phillips, namely that the specification informs the proper construction. The Court further instructed that just with any claim construction, the ultimate goal in derivative construction “is determining the meaning and scope of the patent claims asserted to be infringed.”

The Federal Circuit concluded that the district court erroneously construed perforated using extrinsic evidence that contradicted the intrinsic record. Specifically, in construing “perforated,” consistent with dictionary definitions, to mean “pierced or punctured with holes.” The Federal Circuit explained that the district court did not give due weight to the explicit disclosure of an embodiment utilizing a wedgewire screen. The disclosure of wedgewire screens was inconsistent with the district court’s definition because the openings in wedgewire screens are merely gaps between individual wires, and not formed through piercing or puncturing. The Court found that the prosecution history did not show any disclaimer of the wedgewire disclosure and that the correct construction of “perforated” in this context is simply “having holes or openings.”

Judge Dyk file a separate decision dissenting in part with respect to the construction of “screening medium,” “screening plate,” the derivative construction of “perforated” and reversal of summary judgment of non-infringement. Specifically, Judge Dyk found that the prosecution history, in connection with method claim in the patent that recites a method of manufacturing a screen plate, and the understanding of on skilled in the art at the time of the invention, all supported the district court’s construction of “perforate.”

Patents / Legislation

Pre-AIA Patent Infringement Filings Still Subject to Mis-Joinder Rules

by Paul Devinsky

In a decision that is limited to infringement suits filed prior to the September 16, 2011 date of enactment of the America Invents Act (AIA), the U.S. Court of Appeals for the Federal Circuit, in a case involving 18 cloud storage defendants, has concluded that district courts should stringently apply mis-joinder analysis when the joinder is challenged. In re EMC Corp., Case No. 11-M100 (Fed. Cir., May 4, 2012) (Dyk, J.).

Oasis Research, a company having an office but no personnel in Marshall, Texas, filed suit in the U.S. District Court for the Eastern District of Texas, naming 18 cloud storage companies as defendants. Several of the defendants moved to sever and transfer the claims against them to other venues. The magistrate judge rejected the motions, concluding that the services of all the defendants were not “dramatically different” from each other. Several of the defendants (including EMC) filed a writ to the Federal Circuit seeking a venue transfer.

The Federal Circuit, after noting that § 299 of the AIA has no retroactive affect, analyzed the dispute under the joiner consideration set forth in Fed. R. Civ. P. 20. Under Rule 20(a)(2), defendants can only be joined if the claims against them are asserted “with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences,” and there is a “question of law or fact common to all defendants.” The Federal Circuit rejected Oasis contention that alleged infringement of the same patent supports joinder, although the Court did acknowledge that the claims would raise common questions of claim construction and patent invalidity.

Rather the Court explained that the transaction-or-occurrence test must also be satisfied by showing “a logical relationship between the separate causes of action” against the defendants. As Judge Dyk explained: “[T]he logical relationship test is satisfied if there is substantial evidentiary overlap in the facts giving rise to the cause of action against each defendant. In other words, the defendants’ allegedly infringing acts, which give rise to the individual claims of infringement, must share an aggregate of operative facts.”

The Federal Circuit concluded that the district court's “not dramatically different” standard was inadequate to satisfy Rule 20, as it “seems to require little more than the existence of some similarity in the allegedly infringing products or processes, similarity which would exist simply because the same patent claims are alleged to be infringed.”

In remanding the case to the district court to reconsider whether joinder was appropriate, the Court noted that joinder of independent defendants is only appropriate “where the accused products or processes are the same in respects relevant to the patent.” In cases in which the defendants are not acting in concert, claims should only be joined when “the facts underlying the claim of infringement asserted against each defendant share an aggregate of operative facts.”

The Court further noted that “[i]ndependently developed products using differently sourced parts are not part of the same transaction, even if they are otherwise coincidentally identical.” Although the Federal Circuit acknowledged that a district court has considerable discretion in weighing factual considerations such as the relationship among the defendants or joint licensing or technology agreements, in cases where only “a common question of law or fact” is at issue, a lower court should not use its discretion to consolidate. The Federal Circuit also noted the availability of multidistrict litigation under 28 U.S.C. §1407 for claim construction and invalidity challenges. (See IP Update, this issue—In re Bear Creek Technologies). However, it noted that in “a complicated patent litigation” … “a district court would be justified in exercising its discretion to deny joinder ‘when different witnesses and documentary proof would be required.’”

Patents / False Marking

Rule 9(b) Applies to False Marking Claims

by Eric Garcia

In denying an appellant’s motion for reconsideration, the U.S. Court of Appeals for the Federal Circuit found that the Leahy-Smith America Invents Act (AIA), which amended the false marking statute to retroactively eliminate the qui tam provision from the false marking statute, did not violate the Takings or Due Process Clauses of the United States Constitution. Rogers v. TriStar Prods., Inc., Case Nos. 11-1494; -1495 (Fed. Cir., May 2, 2012) (Bryson, J.; Schall, J.; Prost, J.) (per curiam).

Rogers had initially filed his complaint against TriStar, alleging that TriStar had violated the false marking statute by marking its juicing products with words or phrases claiming that its products were subject to patent protection, when in fact, they were not. The district court dismissed the suit, finding that the false marking statute violated the Take Care Clause of the Constitution because the statute failed to provide the executive branch with sufficient control over the suit. Rogers appealed to the Federal Circuit. While the appeal was pending, the president signed into law the AIA, thereby amending the false marking statute to retroactively eliminate the qui tam provision. Because Rogers conceded that he could not meet the new standing requirement, the Federal Circuit dismissed the appeal as moot. Rogers then filed a motion for reconsideration, challenging dismissal of his appeal on the grounds that the AIA’s amendment violated the Takings and Due Process Clauses.

The Federal Circuit first noted that in civil cases, no litigant is entitled to insist that a law that prevailed at the time the case began shall remain unchanged solely for his or her benefit. In addition, no “vested” right attaches to a suit merely because a complaint is filed. The fact that Rogers brought a qui tam action did not alter the Court’s position. Although the Supreme Court has described qui tam statutes as “effecting a partial assignment of the Government’s damages claim,” the “assignments” were revocable prior to final judgment. Accordingly, the Federal Circuit held that the AIA’s amendment did not violate the Takings Clause.

Regarding Rogers’ Due Process arguments, the Federal Circuit reasoned that Rogers failed to explain how Congress acted irrationally in retroactively eliminating the qui tam provision. The Federal Circuit found that Congress was attempting to rein in abuses in false marking actions by limiting such suits to only those parties who had actually suffered a competitive injury as a result of the false marking. That objective, the Federal Circuit noted, was a legitimate justification for making the AIA amendments retroactive. Accordingly, the Federal Circuit held that the AIA’s amendment did not violate the Due Process Clause.

Practice Note: Given this decision by the Federal Circuit, it now appears likely that the era of “false marking trolls” is finally over. (See IP Update, Vol. 14, No. 3; Vol. 13, No. 9; Vol. 13, No. 1). However, there may be at least one more part of the saga to pay out. Public Patent Foundation, Inc., in the appeal to the Federal Circuit of the dismissal of its false marking suit against McNeil-PPC (alleging marking using expired patents on Tylenol® packaging) has asked the Federal Circuit to take its appeal en banc; i.e., to attempt to avoid the controlling panel decision in Rogers.

Trademarks

I’ll Drink to That! (Trade Dress)

by Natalie A. Bennett

In a case focusing on trade dress for a bourbon bottle, the U.S. Court of Appeals for the Sixth Circuit has now expressly adopted the “aesthetic functionality” doctrine for trademark protection. The bourbon bottle in issue was the subject of extensive historical and anecdotal treatment at the outset of the opinion. Writing for the panel, Judge Boyce Martin affirmed that Maker’s Mark’s “signature trade dress element—a red dripping wax seal—is due protection.” Maker’s Mark v. Diageo N. Am., Case Nos. 10-5508; -5586; -5589 (6th Cir., May 9, 2012) (Martin, J.).

Bourbon producer Maker’s Mark sued the producers of Jose Cuervo tequila over the red dripping wax seal found on their premium “Reserva de la Familia” bottles. Finding that Maker’s Mark occupies a “central place in the modern story of bourbon,” with secondary meaning acquired through years of strong advertising and brand marketing, the panel agreed that the registered trademark was “extremely strong.”

A central issue on appeal was whether the red dripping wax seal was invalid due to its alleged aesthetic functionality. Prior to the issuance of this decision, the 6th Circuit had not clarified its test for aesthetic functionality and declined to do so here. However, with due regard for the Supreme Court dicta regarding aesthetic functionality in TrafFix Devices v. Marketing Displays, Inc. (see IP Update, Vol. 4, No. 5), the analysis centered on whether the protected feature “serves a significant function” and whether “the exclusive use of that feature by one supplier would interfere with legitimate competition.” In applying the two alternative tests, the 6th Circuit endorsed the aesthetic functionality doctrine and concluded that under either rationale Jose Cuervo’s arguments in support of its cancellation counterclaim failed.

First, under a comparable alternatives inquiry, the design was not functional because it would not be difficult or costly for a competitor to design around the red wax seal. As recognized by the district court, there is more than one way to seal a bottle with wax to make it aesthetically appealing. Under such circumstances, the court concluded a mark holder can prevent competitors from using a confusingly similar design. Second, under the effective competition test, the court concluded the design was not functional because it did not hinder a competitor’s ability to succeed in the market. For example, Cuervo would not be at a disadvantage by being precluded from using the red wax because it could still be successful by using a different color seal.

After determining that the dripping wax trademark was enforceable, the court affirmed the infringement finding through application of the 6th Circuit’s Frisch factors. The court discussed each of the eight factors and determined there was a likelihood of consumer confusion. The strength of the red wax seal was found to be inherently distinctive based on its physical uniqueness and its commercial recognition. The 6th Circuit found that the similarity between the red dripping wax on the Maker’s Mark and Cuervo products also contributed to the likelihood of confusion, even if there were identifying labels and even in the absence of meaningful evidence of actual confusion.

Practice Note: A theme guiding Judge Martin’s discussion was that the wax seal is not functional because it was not essential to the bourbon bottle. Given that the red dripping wax had been a “hallmark” on Maker’s Mark since 1958, the court concluded that the circumstances in support of trademark protection were compelling.

Trademarks / Criminal Counterfeiting

Fashion Fakes: No Counterfeit Burberrys® Allowed Here

by Sarah Bro

The U.S. Court of Appeals for the Fourth Circuit affirmed convictions of criminal counterfeiting based on the defendants’ manufacture, importation and sale of handbags and wallets bearing marks “substantially indistinguishable” from the registered trademarks of fashion house Burberry, namely Burberry’s signature colored plaid pattern (the “Burberry Check” mark), which was registered with the U.S. Patent and Trademark Office (PTO) in 1996. In upholding the convictions, the 4th Circuit found that there was sufficient supporting evidence presented at trial, and that certain contested statements of the law made by the government did not deprive the defendants of a fair trial due to curative jury instructions from the district court. United States v. Lam, Case No. 11-4056 (4th Cir., April 16, 2012) (Duncan, J., Shedd, J., joining) (Floyd, J., partial concurrence, partial dissent and dissent from the judgment).

The defendants owned or controlled at least 10 U.S. companies engaged in importation of legitimate and counterfeit handbags and wallets. They also had authority over at least three companies in China and Hong Kong that manufactured and exported counterfeit goods.

The criminal charges were based on three different seizures by U.S. Customs and Border Patrol (CBP) during a two-month period in 2005. Shipments addressed to one of the defendants’ companies were seized in Norfolk, Virginia and contained handbags and wallets bearing alleged counterfeit Burberry marks hidden amongst legitimate handbags.

After they were indicted on charges of conspiracy to traffic counterfeit goods under 18 U.S.C. §371, trafficking counterfeit goods under §2320(a) and smuggling under §545, the defendants’ first trial (in the U.S. District Court for the Eastern District of Virginia) resulted in a hung jury.

To obtain a conviction under §2320(a), the government is required to prove that the defendants intentionally used a mark which is known to be counterfeit in connection with trafficking or attempted to traffic goods or services. Under the statute, a counterfeit mark is defined as use of “a spurious mark … that is identical with, or substantially indistinguishable from, a mark registered … in the United States Patent and Trademark Office and in use.”

Before the trial, the defendants filed a motion in limine seeking to have the district court declare the phrase “substantially indistinguishable” unconstitutionally vague. The district court denied the motion.

At trial, the government presented evidence including CBP testimony, authentic Burberry handbags and testimony that Burberry filed a civil suit in 2005 against one of the defendants’ companies which resulted in a consent judgment in Burberry’s favor. That lawsuit was based on a U.S. copyright application filed by one of the defendants’ companies for an equestrian knight (similar to another registered Burberry trademark) superimposed over a plaid pattern resembling the Burberry Check mark.

Also during trial, the government indicated, on several occasions, that whether a claimed counterfeit mark was “substantially indistinguishable” from a legitimate mark should be based on the opinion of a “reasonable consumer of ordinary intelligence,” or an “average person.” The defendants objected to the government’s phrasing as an incorrect statement of the law, and the objections were sustained by the district court. The district court then instructed the jury that it was to apply the definition of the law as set forth by the court and not by the government, and it instructed the jury to compare the marks side-by-side using their “own eyes” to decide for themselves whether they were “substantially indistinguishable.” The jury then found the plaid pattern on the seized goods to be a counterfeit of the Burberry Check mark, and the defendants were found guilty on all charges.

The defendants moved for acquittal and a new trial, claiming that the evidence was insufficient as a matter of law and that the government’s misstatements deprived them of a fair trial. Although the district court agreed that the government’s misstatements of the law were misleading and extensive, it used the 4th Circuit’s six-part test from U.S. v. Lighty to determine that the defendants received a fair trial, because the government did not intend to purposely mislead the jury, and because the evidence was sufficient to support the convictions absent the misstatements. Thus, the motions were denied.

On appeal to the 4th Circuit, the defendants challenged the sufficiency of the evidence presented by the government to show that the marks were “substantially indistinguishable.” The 4th Circuit, however, held that the marks were similar enough to allow a reasonable jury to conclude that the defendants’ goods were fake, especially in view of evidence that Burberry often sells goods that contain both the Burberry Check mark and the Burberry equestrian knight mark, even if the marks were not registered as one unitary mark. In addition, because the defendants sold the same category of goods as Burberry (i.e., handbags and wallets), the court found such evidence was sufficient to support the jury’s finding that the marks were “substantially indistinguishable.”

The court also dismissed the defendants’ claim that the counterfeiting statute was unconstitutionally vague. Construing the language of the statute as a whole, the 4th Circuit held that the plain language of the statute was unambiguous in defining the degree to which a spurious mark must resemble a registered trademark to be determined counterfeit.

Finally, the 4th Circuit held that the district court did not abuse its discretion in ruling that its curative instructions to correct the government’s misstatements at trial were sufficient. The 4th Circuit determined that the defendants were afforded a fair trial and affirmed the district court’s rulings.

Judge Floyd dissented from the judgment because he believed that the government’s misstatements of the law at trial deprived the defendants of a fair trial. In particular, Floyd thought the government attempted to mislead the jury due to the frequency and severity of its statements during trial and closing arguments.

Copyrights / DCMA

How Deep Is the Safe Harbor?

by Paul Devinsky

In a case that has now been in litigation for more than five years, and in an appeal that drew close to a hundred amici briefs, the U. S. Court of Appeals for the Second Circuit has explained its position on the contours of the Digital Millennium Copyright Act's (DCMA's) safe harbor provision that limits the liability of online service providers who permit users to post content on their websites. Viacom Int'l v. YouTube, Case No. 10-3270 (2nd Cir., April 5, 2012) (Cabranes, J.).

The trial court granted summary judgment to YouTube on all claims of direct and secondary copyright infringement, concluding that YouTube was immune from liability under the safe harbor provision of the DCMA, 17 U.S.C. § 512.

Viacom appealed and the 2d Circuit has now reversed the summary judgment. While reiterating that liability (for copyright infringement) under the DCMA requires proof that an online service provider has “knowledge or awareness of specific infringing activity,” the 2d Circuit vacated the summary judgment concluding that “a reasonable jury could find that YouTube had actual knowledge or awareness of specific infringing activity on its website.” In its remand, the 2d Circuit instructed the district court to determine, for some specific video clips, whether YouTube had knowledge or awareness of specific instances of infringement and instructed the district court to apply the “willful blindness” doctrine “in appropriate circumstances.” The Second Circuit also instructed the district court to review whether YouTube’s right and ability to control infringement on its site made the DMCA’s safe harbors inapplicable.

Copyrights / Litigation

Fact Issues Preclude Summary Judgment in Fabric Design Infringement Suit

by Elisabeth (Bess) Malis

The U.S. Court of Appeals for the Ninth Circuit recently reversed and remanded a district court’s grant of summary judgment in a copyright infringement action over fabric design, concluding that genuine issues of material fact existed with respect to access and substantial similarity. L.A. Printex Industries, Inc. v. Aeropostale, Inc., Case No. 10-56187 (9th Cir., Apr. 9, 2012) (Gould, J.).

L.A. Printex, a Los Angeles-based fabric printing company, designed a floral pattern and registered it with the U.S. Copyright Office. L.A. Printex discovered that Aeropostale, a mall-based clothing retailer, was selling shirts bearing a floral design allegedly similar to that created and registered by L.A. Printex. Mrs. Bubbles, Inc., a Los Angeles-based apparel wholesaler, supplied the shirts to Aeropostale. L.A. Printex sued Aeropostale and Mrs. Bubbles for infringement of its copyrighted floral design. The district court granted summary judgment in favor of defendants, holding that there was no genuine issue of material fact regarding the defendants’ non-access to the plaintiff’s copyrighted design, as well as that the design between the parties’ fabrics went only to the unprotectable idea of small-scale floral patterns. L.A. Printex appealed.

The 9th Circuit reversed. Absent direct evidence of copying, the court explained that a copyright plaintiff can demonstrate infringement by showing that the defendant had access to the copyrighted material and that there is a substantial similarity between the works. First, the court noted that L.A. Printex raised a genuine dispute of material fact as to access. Proof of access requires “an opportunity to view or to copy plaintiff’s work.” Evidence that a copyrighted work was widely disseminated can prove access. The Court found that L.A. Printex’s sale of more than 50,000 yards of fabric bearing its floral design qualified as “widespread dissemination.” Further, as L.A. Printex and Mrs. Bubbles both operate in the Los Angeles apparel industry, the court found it conceivable that Mrs. Bubbles had an “opportunity to view and copy” the plaintiff’s design.

Second, noting that summary judgment is “not highly favored” on questions of substantial similarity in copyright cases, the 9th Circuit found that a genuine dispute of material fact as to substantial similarity existed under the “extrinsic” (or objective) test for substantial similarity. The court noted that a reasonable juror could find that the parties’ floral designs are substantially similar, due to objective similarities in the pattern, arrangement and color arrangement of the flower bouquets in the design. Turning to the “intrinsic text” of substantial similarity, which is a subjective comparison focusing on whether an “ordinary, reasonable observer” would find the works substantially similar, the Ninth Circuit concluded that that in this instance, the determination was not appropriate for summary judgment and must be decided by a jury.

On this basis, the 9th Circuit reversed the district court’s grant of summary judgment in favor of the defendants and remanded the case for further proceedings.

Practice Note:Once a copyright plaintiff has established a triable issue of fact as to objective similarities between the works at issue, the substantial similarity analysis is no longer suitable for summary judgment and should be submitted to a trier of fact.

Copyrights / First Sale Doctrine

Supreme Court to Decide Application of First Sale Doctrine to Foreign-Made Copyrighted Works

by Rita Weeks

The U.S. Supreme Court has agreed to hear a case involving “gray market” resale of copyrighted works and the defense of the “first sale doctrine.” The “first sale doctrine” in copyright law permits the owner of a lawfully made copy of a copyrighted work to resell or otherwise dispose of that copy without limitations imposed by the copyright holder. Kirtsaeng v. John Wiley & Sons, Inc., Docket No. 11-607 (Supr. Ct., April 16, 2012). Essentially the same issue was raised at the Supreme Court in 2010 but the Court ended up in a 4-4 split (with Justice Kegan recusing herself).

Textbook publisher John Wiley & Sons brought a copyright infringement suit against Kirtsaeng, a graduate student from Thailand. Kirtsaeng’s friends and family shipped him foreign editions of Wiley textbooks printed abroad by Wiley’s affiliate Wiley Asia, which Kirtsaeng then sold on commercial websites such as eBay for allegedly substantial profits. Wiley alleged that Kirtsaeng violated Wiley’s copyrights by unauthorized importation of textbooks only intended for a foreign market. Kirtsaeng attempted to proffer the “first sale doctrine” as a defense but the district court rejected the applicability of the defense to foreign editions of textbooks. A jury found Kirtsaeng liable for willful copyright infringement and awarded Wiley $600,000 in statutory damages.

On appeal to the Second Circuit, Kirtsaeng argued that the district court erred in holding that the first sale doctrine was not an available defense, but the U.S. Court of Appeals for the Second Circuit affirmed the district court (see IP Update, Vol. 14, No. 9). The 2d Circuit, reviewing § 109(a) of the Copyright Act, codification of the first sale doctrine, noted that the language limiting its application to works “lawfully made under this title” was ambiguous such that the statute neither compelled or foreclosed application of the first sale doctrine to works manufactured abroad. Therefore, the 2d Circuit then looked to § 602(a)(1) of the Copyright Act, which prohibits the importation of a work acquired abroad without the copyright owner’s authorization, and the Supreme Court’s guidance in Quality King Distributors, v. L’anza Research International. Quality King involved copyrighted works manufactured in the United States that were exported to foreign distributors, who then re-imported the works back into the United States for resale without the copyright owner’s permission. In that context, the Supreme Court unanimously held that the first sale doctrine limited the scope of § 602(a) and thus the foreign distributor who re-imported the works could assert the first sale doctrine as a defense. However, the Quality King Court did not rule on whether the first sale doctrine would apply to works manufactured outside of the United States, however. Nevertheless, the 2d Circuit in Kirtsaeng held that the first sale doctrine only applies to products physically manufactured in the United States. To find otherwise, the court reasoned, would nullify the protections of § 602(a)(1) in the vast majority of cases.

In granting certiorari, the Supreme Court order indicated it will consider whether such a foreign-made product can never be resold within the United States without the copyright owner’s permission; can sometimes be resold within the United States without permission, but only after the owner approves an earlier sale in this country; or can always be resold without permission within the United States, so long as the copyright owner authorized the first sale abroad. Oral arguments will be heard in the fall of 2012.

Practice Note: The grant of certiorari is significant because the Supreme Court’s 4-4 decision in Costco Wholesale Corp. v. Omega, S.A.. In that case Costco legitimately acquired Omega-brand watches through a company that bought and imported the watches from overseas at much lower prices than Costco would otherwise have paid. While copyright owner Omega had authorized the initial foreign sale of the watches, it did not authorize their importation into the United States or their resale by Costco. The U.S. Court of Appeals for the Ninth Circuit held that the first sale doctrine did not apply to purchases made outside of the United States, and an equally split Supreme Court agreed. The Supreme Court’s decision in Kirtsaeng should resolve the question of how the first sale doctrine and § 602 apply to copies of copyrighted works made and legally acquired abroad and then imported into the United States. It is expected that this decision will be of particular importance to importers, distributors and retailers of copyrighted goods produced abroad.

Trade Secret Misappropriation / Criminal Prosecution

Ex-Employee Escapes Economic Espionage Act

by Stephen M. Yu

Addressing for the first time the Economic Espionage Act in a case involving stolen high-frequency-trading source code, the U.S. Court of Appeals for the Second Circuit held that a computer programmer’s theft and transfer of an employer’s proprietary source code did not constitute a criminal offense under either the Economic Espionage Act of 1996 (EEA) or the National Stolen Property Act (NSPA). U.S. v. Aleynikov, Case No. 11-1126 (2d Cir., Apr. 11, 2012) (Jacobs, J.) (Calabresi, J., concurring).

Under the EEA, 18 U.S.C. §1832(a) it is a criminal offense to intentionally “convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce,to the economic benefit of anyone other than the owner.” The NSPA, 18 U.S.C. § 2314 also makes it a federal offense for anyone to “transport, transmit, or transfer in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.”

The district court convicted Sergey Aleynikov, a computer programmer, of violating both the EEA and NSPA when he stole proprietary source code from his employer, Goldman Sachs, in an effort to develop a competing high frequency trading (HFT) system for his new employer. Goldman’s source code is a carefully guarded trade secret in its HFT system, which involves the execution of large trades based on rapid decisions made by complex algorithms for seizing fleeting markets opportunities. On his last day at Goldman, Aleynikov encrypted and uploaded Goldman’s HFT source code to a server in Germany, then downloaded the code to his home computer. Aleynikov later transferred the code to a laptop and flash drive which he took to his new employer. Aleynikov appealed his conviction.

On appeal, the 2d Circuit vacated the convictions under both the EEA and NSPA, finding Aleynikov was wrongly charged on both counts. Notwithstanding the evidence of theft, the Court held that stealing Goldman’s source code did not amount to espionage within the meaning of the EEA. The court reasoned that since Goldman’s HFT was used strictly internally and with no intention of selling or licensing it to anyone, the HFT system was not a product “produced for” or “placed in” the stream of commerce. As a result, Aleynikov was found not to have committed espionage under the EEA.

In vacating the NSPA conviction, the 2d Circuit joined several other circuits in relying on Dowling for the proposition that the theft and interstate transmission of purely intangible property is not subject to prosecution under the NSPA. Because Aleynikov stole purely intangible property embodied in a purely intangible format and since he did not “assume physical control” over anything tangible, i.e., goods, wares or merchandise, he was erroneously subjected to prosecution under the NSPA.

As noted by the 2d Circuit, Aleynikov was indicted on a third count under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030(a)(2), which was later dropped upon finding that Aleynikov did not exceed the scope of his authorization. Under the CFAA, authorized use of a computer in a manner that misappropriates information is not a federal offense. U.S. v. Nosal (see IP Update, Vol. 14, No. 5).