TheraSense, Inc. v. Becton, Dickinson and Co., Nos. 2008-1511, -1512, -1513, -1514, -1595 (Fed. Cir. May 25, 2011) (en banc)

By Antigone Peyton

TheraSense, which adjusts the legal standard for the equitable doctrine of inequitable conduct, is one of our ten “really important” opinions issued by the Federal Circuit in the last few years.  The TheraSense revolution may be short-lived, however, because the Supreme Court might decide to weigh in on the inequitable conduct doctrine that has been applied—for many years—by the lower courts (never by the Supreme Court) in the patent law context.  Stay tuned.

The case was argued en banc, before the active circuit court judges, in November of 2010.  The court, in a split decision, has now determined that it will abandon a number of legal standards it used in the past when analyzing whether a party has engaged in inequitable conduct.  A finding of inequitable conduct means that an entire patent (and in some cases other patents in the patent family) is completely unenforceable.

The majority (Chief Judge Rader and Judges Newman, Lourie, Linn, Moore, and Reyna, with Judge O’Malley joining the intent portion of the opinion) began its analysis with a discussion of the trio of Supreme Court “unclean hands” (read bad-behavior) cases that gave birth to the doctrine.  Those cases punished egregious misconduct relating to patent prosecution or later litigation-related activities.  The court then traced the divergence of the unclean hands defense and inequitable conduct doctrine.  Inequitable conduct has been expanded to encompass a broader scope of misconduct (beyond affirmative efforts to defraud the PTO or the courts) and a harsher remedy (unenforceability of the entire patent or patent family rather than dismissal of a particular lawsuit).  Yet the doctrine has become unwieldy and has had a number of unintended and undesirable negative effects.  So the court elected to tighten the legal standards for finding inequitable conduct, “in order to redirect a doctrine that has been overused to the detriment of the public.”  Slip op. at 24.

In order to show that the patentee committed inequitable conduct, the accused infringer must now prove: (1) that the patentee acted with the specific intent to deceive the PTO, and (2) “but for” those actions the application would not have issued as a patent.  Once these threshold requirements are met, the court is to consider the facts and circumstances before it and determine whether they warrant a judgment that the patent (or a family of patents) should be rendered unenforceable forever as a sanction for that conduct.

This means that a showing of gross negligence or mere negligence is not sufficient to meet the new intent to deceive requirement under any circumstances.  In a case involving an alleged failure to disclose information, there must be clear and convincing evidence that the applicant made a deliberate decision to withhold a known material reference.  The specific intent to deceive may be adduced from circumstantial evidence, but it must be the “single most reasonable inference” that can be drawn from the available evidence.

Likewise, the court adjusted the second prong of the analysis that relates to the materiality issue.  Drawing from the Supreme Court’s guidance in Corona Cord Tire Co. v. Donovan Chemical Corp., 276 U.S. 358, 373-74 (1928), the court concluded that the “but for” standard used in that patent case concerning the validity of a patent is the appropriate one to use for the inequitable conduct analysis.  When a patent applicant fails to disclose prior art to the PTO, that prior art is material if the PTO would not have allowed a claim had it been aware of that art.  The court also recognized an exception to this standard in the form of affirmative egregious misconduct, such as filing a false affidavit with the PTO—those actions will evidently be deemed per se material.

After it announced its revamped inequitable conduct standard, the court vacated the district court’s inequitable conduct judgment and remanded the issue to that court for reconsideration in light of its revised standard.

Judge O’Malley agreed with the portion of the majority’s opinion that announced the specific intent standard, but otherwise dissented.  Noting that the inequitable conduct doctrine is equitable in nature, she expressed a desire to build greater flexibility into the law to allow the district court discretion to fashion appropriate remedies based on the nature of the improper conduct.  (Remember that, until recently, Judge O’Malley was one of those judges who worked in the trenches and ruled on these issues.)  For example, Judge O’Malley would give the district court discretion to render fewer than all of the claims before it unenforceable, dismiss the case, or fashion other appropriate remedies.  Additionally, she deems the materiality test too rigid for an equitable form of relief, though she agreed with the majority view that PTO Rule 56 is not the proper yardstick to evaluate materiality in the inequitable conduct context.

Judges Bryson, Gajarsa, Dyk, and Prost dissented.  While they agreed that the law of inequitable conduct “is in an unsatisfactory state and needs adjustment,” they had something different in mind.  The dissent considers the PTO’s Rule 56 disclosure standard, which has been used in a number of prior Federal Circuit opinions, the appropriate standard that creates the right balance of incentives relating to full and frank disclosure of information to the PTO.  The dissent was persuaded by the PTO’s amicus brief in which it argued that the Rule 56 standard was necessary to encourage compliance with the duty of disclosure.  The dissent also noted that the strict pleading requirements of Federal Rule of Civil Procedure 9(b), which were applied by this court to inequitable conduct claims for the first time in 2009, will have a significant effect on curbing abuse of this claim in future patent cases.

Given the fractured court opinions, and the fact that the Supreme Court has received a number of petitions requesting review of the inequitable conduct doctrine over the last few years (including one filed by yours truly in the Ferring case), this case is one to watch.  The Supreme Court may decide that it should give us its view of this doctrine.  After all, the Federal Circuit’s predecessor patent court created it, not the high court.

Read the TheraSense en banc opinion here.

 

Tessera, Inc. v. International Trade Commission, No. 2010-1176 (Fed. Cir. May 23, 2011) (Judges Lourie, Linn, and Dyk)

By Matt Levy

This is an important licensing and patent exhaustion case involving a method of packaging semiconductor chips.  Tessera filed a complaint with the ITC alleging that eighteen respondents infringed the ’106, ’977, and ’627 patents.  (A fourth patent was terminated from the investigation before the hearing.)  There were two categories of accused products: those with a polyimide-based package substrate (“μBGA”) and those with a laminate-based package substrate (“wBGA”).  Ten respondents remained in the case, and intervened in the appeal.

Tessera’s licenses all state that “Licensee is licensed only to Licensed Products for which Licensee or a third party has satisfied a royalty obligation of Tessera.”  Tessera claimed that because some licensees were behind on their royalties, products sold by those licensees were not authorized, and hence the sale of those products to third parties who were not current on royalty payments does not exhaust its patent rights.  All of the respondents bought at least some of their components from Tessera’s licensees.

The ALJ found no infringement of the patents-in-suit, found that they were not invalid, and found Tessera’s patent rights were exhausted as to those accused products that had been purchased from its licensees. The Commission reviewed the noninfringement findings of the ALJ, and modified his claim construction ruling for the terms “top layer” and “thereon.”  As a result of these revised constructions, the Commission found that the μBGA products infringed, but it affirmed the ALJ’s finding that patent exhaustion applies.  The Commission also affirmed the ALJ’s finding that the wBGA products do not infringe the asserted claims of the ’106 patent.  Thus, the Commission found no violation of 19 U.S.C. § 1337.

Tessera appealed the claim construction ruling, the finding of no infringement by the wBGA products, the finding of patent exhaustion, and asked the court to vacate as moot the Commission’s finding of no infringement of the ’977 and ’627 patents, which have now expired.  The respondents appealed the finding of no anticipation of the ’106 patent.

The court rejected Tessera’s appeal of the claim construction ruling, as the Commission adopted Tessera’s proposed constructions. The court agreed with the respondents that Tessera was trying to change the standard of review by framing an issue of application of a claim construction (which is reviewed for substantial evidence) into one of claim construction (which is reviewed de novo).  You can’t blame Tessera for trying, though.

The Federal Circuit held that substantial evidence supported the Commission’s finding of no infringement by the wBGA products and affirmed the finding that none of the offered references anticipate the asserted claims of the ’106 patent.  The court also vacated the Commission’s finding of no infringement of the ’977 and ’627 patents as moot, in light of the fact that both patents were expired.  (Even though a Final Determination has no res judicata effect, district courts often find them persuasive, so it is understandable that Tessera would request that the Commission’s Final Determination be vacated.)

The most likely part of this opinion to make an impact, however, is the section on patent exhaustion.  The ITC actually declined to review the ALJ’s finding of patent exhaustion.  Elpida (the only respondent that imports μBGA products) and the Commission argued that as a result, Tessera should have appealed that finding within sixty days of the Notice of Review.  That is, the issue was final as of the date of the Notice of Review, which started the clock running.  The court disagreed, noting that under the Commission’s own regulations the Notice of Review could not be appealed because some issues were selected for review.  Thus, the court found that it had jurisdiction over the patent exhaustion issue.

Tessera argued that the failure of the licensees to pay their royalty obligations meant that any products sold by those licensees were unauthorized under the unambiguous terms of the licenses.  Hence, the theory goes, patent rights couldn’t be exhausted as to those products.  To rule otherwise, Tessera claimed, effectively denies them any recovery with respect to infringing products purchased from delinquent licensees.

The Federal Circuit was unconvinced.  It held that under Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008), the licensees were initially authorized to sell products, and that initial authorization exhausted Tessera’s patent rights.  The failure to fulfill a condition subsequent could not undo the initial authorization.

“Tessera’s argument that the sale is initially unauthorized until it receives the royalty payment is hollow and unpersuasive.  The parties do not dispute that the TCC Licenses permit a licensee to sell licensed products before that licensee pays royalties to Tessera.  But according to Tessera, that licensee’s sale, permitted under the TCC License, would later become unauthorized if that licensee somehow defaulted on a subsequently due royalty payment.  That absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion—to prohibit postsale restrictions on the use of a patented article.” Slip op. at 23.

The court also stated that Tessera’s remedy for unpaid royalties is to seek them from the licensees, not their licensees’ customers.

The type of provision in Tessera’s licenses has become a fairly common technique to try to avoid the patent exhaustion effects of the Quanta decision.  This ruling casts serious doubt on the validity or usefulness of these types of license clauses.

You can read the opinion here.

Allergan, Inc. v. Athena Cosmetics, Inc., No. 2010-1394 (Fed. Cir. May 24, 2011) (Judges Newman, Gajarsa, and Prost)

By Marynelle Wilson

This case addresses a question of standing under the unfair competition provisions (UCL) of California’s Business & Professions Code.  Allergan sued Athena and several other cosmetics companies for patent infringement and unfair competition relating to Allergan’s Latisse® product, which uses PGF, a prostaglandin compound, to stimulate eyelash growth.  Allergan is the only manufacturer of PGF that has FDA and state regulatory approval to use PGF to stimulate hair growth.  Allergan alleged that the defendants violated the UCL by marketing, selling, and distributing products containing PGF for hair and eyelash growth and that defendants’ unfair competition led to “irreparable injury to Allergan, including but not limited to lost sales, revenue, market share, and asset value.”  Slip op. at 5 (citations omitted).  Allergan requested an injunction and monetary compensation.

Athena moved to dismiss these claims, asserting that Allergan did not meet the UCL’s standing requirements. When the motion was filed and decided, California state courts had limited standing to “individuals who suffer losses of money or property that are eligible for restitution.”  Slip Op. at 5. The district court dismissed the unfair competition claims for lack of standing, citing state case law that held that a plaintiff seeking restitution needs “an ownership interest or vested interest in the money it seeks to recover.”  Slip op. at 6.  The district court determined that Allergan had neither ownership interest or vested interest in lost profits or market share because both interests were contingent on payments from third-party consumers.  The district court entered final judgment on the standing issue under Rule 54(b), and Allergan appealed the dismissal.

The Federal Circuit, relying on two recent California Supreme Court opinions, reversed and remanded.  The court cited Kwikset Corp. v. Superior Court of Orange County, 246 P.3d 877 (Cal. 2011) and Clayworth v. Pfizer, Inc., 233 P.3d 1066 (Cal. 2010), both of which held that a plaintiff must only allege (1) an economic injury, and (2) that the economic injury was caused by the unfair business practice in order to satisfy the UCL’s standing requirements.  Kwikset overruled earlier cases that imposed a “compensable by restitution” rule.  Rather than merely vacating the district court’s decision and sending the issue back for reconsideration, the Federal Circuit applied the newly defined standing requirements itself and held that Allergan has standing to sue in this case.  The Federal Circuit also rejected the defendants’ argument that the UCL requires direct business dealings with the defendant and concluded that Allergan met the standing requirements.

Read the Allergan opinion here.

McKesson Technologies Inc. v. Epic Systems Corp., No. 2010-1291 (Fed. Cir. May 26, 2011) (en banc order) (nonprecedential)

By Antigone Peyton

McKesson now joins the Akamai divided infringement case on the Federal Circuit’s en banc docket.  (Check out our blog post on the McKesson panel decision and divided infringement here.)  While the two cases are not on the exact same briefing track, we expect that the court will consider both cases together.  This order asks the parties to provide supplemental briefing that addresses two new issues:

(1) If separate entities each perform separate steps of a method claim, under what circumstances, if any, would either entity or any third party be liable for inducing infringement or for contributory infringement?  See Fromson v. Advance Offset Plate, Inc., 720 F.2d 1565 (Fed. Cir. 1983).

(2) Does the nature of the relationship between the relevant actors—e.g., service provider/user; doctor/patient—affect the question of direct or indirect infringement liability?

Now the full court has the rare opportunity to consider an important legal issue and receive briefing regarding the expected impact of various standards that it might ultimately adopt in the context of two different industries.  The Akamai and McKesson cases involve computer and medical technologies respectively and different alleged infringer relationships between the parties involved in these industries that may be held liable for their activities.  Usually, the court must rely on thoughtful amicus briefs that discuss the likely or real impact of particular rules and standards on their industry.  Undoubtedly, the Akamai/McKesson divided infringement cases will garner a lot of attention from a wide variety of industries that may be affected by the court’s en banc analysis of the divided infringement issues and standards.

Read the order granting McKesson’s request for en banc review here.

 

Eli Lilly & Co. v. Sicor Pharmaceuticals, Inc., No. 2010-1342, -1343 (Fed. Cir. May 26, 2011) (Judges Gajarsa, Mayer, and Prost) (nonprecedential order)

By Marynelle Wilson

This order concerns Eli Lilly’s motion to allow further briefing for appeal no. 2010-1343.  At the U.S. District Court for the Southern District of Indiana, Sicor successfully argued that claim 7 of the asserted patent is invalid for obviousness-type double patenting, and that the U.S. District Court for the Eastern District of Michigan’s decision in Sun Pharmaceuticals v. Eli Lilly & Co., which involved the same patent claims, collaterally estopped Eli Lilly from arguing that obviousness-type double patenting did not apply to claim 7.  The Federal Circuit affirmed the Michigan court’s judgment and denied Eli Lilly’s petition for rehearing in Sun Pharmaceuticals.  This appeal had been stayed pending the outcome of the Sun Pharmaceuticals appeal, and Eli Lilly wanted the opportunity to revisit the Sun Pharmaceuticals decision.  The Federal Circuit, however, found that the trial court had correctly applied the collateral estoppel doctrine and summarily affirmed appeal no. 2010-1343.

Read the original order here.

 

Genelink Biosciences, Inc. v. Colby, No. 2010-1454 (Fed. Cir. May 25, 2011) (Chief Judge Rader, Circuit Judges Lourie and O’Malley) (nonprecedential order) and Arc Products, LLC v. Kelly, No. 2011-1122 (Fed. Cir. May 25, 2011) (Chief Judge Rader, Circuit Judges Lourie and O’Malley) (nonprecedential order)

By Marynelle Wilson

These two orders arise from the same facts.  In both cases, the plaintiff sued its attorney in state court for malpractice during patent prosecution, specifically for missing filing deadlines.  The defendant removed the suit to federal court on the grounds that the patent might have issued but for the defendant’s alleged negligence, and therefore substantive patent laws are at issue (invoking federal law and federal court jurisdiction).  The plaintiff, in turn, moved for remand to state court, arguing that any patent issues are incidental or procedural.  The district court granted the plaintiff’s motion based on its determination that no federal jurisdiction exists and remanded to state court.  The defendant in both cases appealed the remand order to the Federal Circuit.

On appeal, the Federal Circuit held that it does not have authority to entertain the appeal.  The court relied on the statutory provision that governs reviewability of remand orders, 28 U.S.C. § 1447(d), which states:  “An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise . . . .”  Genelink slip op. at 4; ARC Products slip op. at 3.  The court distinguished these case from its recent decisions in Davis v. Brouse McDowell, L.P.A., 596 F.3d 1355 (Fed. Cir. 2010) and Warrior Sports, Inc. v. Dickinson Wright, P.L.L.C., 631 F.3d 1367 (Fed. Cir. 2011), stating that in those appeals the district court had addressed the merits of the cases.  Here, the district court remanded due to lack of subject matter jurisdiction.  It seems that these cases involved allegedly missing filing deadlines rather than any substantive questions of patent law such as allegedly inadequate drafting of a patent application (Davis) or alleged inequitable conduct (in Warrior Sports).

Read the Genelink order here.

Read the ARC Products order here.

 

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