IP Update, Vol. 14, No. 6, June 2011 - Part 1

Edited by Paul Devinsky and Rita Weeks

Patents

• Supreme Court Affirms Clear and Convincing Standard of Patent Invalidity Proof
• Actual Knowledge an Element of § 271(B) Inducement, but Willful Blindness Will Suffice
• Even Under Bayh-Dole, Employee Inventor Has First Dibs
• Federal Circuit Ratchets Up Materiality Requirement for Inequitable Conduct
• Rambus Encore: Duty to Preserve Documents for Litigation Clarified
• Analogous Art Must Address the Entire Problem Solved by the Patent
• For Infringement Purposes, Preamble Can Define a Limiting Environment Rather than a Claim Limitation
• Vendor's Economic Injury Is Insufficient to Establish DJ Jurisdiction, but Implicit Claim of Contributory Infringement Is Enough
• Patent Exhaustion Still Applies when Licensees Fail to Pay Royalties
• Endo Finds Pain Relief from Board's "Erroneous Reasoning"
• In re Brimonidine Patent Litigation: Obviousness Determinations Revisited
• Wrongful Injunction Raises Presumption of Recovery of Bond
• No En Banc Rehearing for the 25 Percent Rule
• Prometheus Rises Again

Trademarks

• Standard Applies to Preliminary Injunctions in Trademark Cases

Copyrights

• Second Circuit Revives Copyright Infringement Suit Against Non-Resident for Uploading Copyrighted Material Online
• Prejudgment Interest in Copyright Infringement Suit Tracks to Date of First Infringement

Competition

• Standing Under California § 17200 Only Requires Injury From Business Practice

Trade Secrets

• Combining Disclosed Technology Can Be a Protectable Trade Secret

Patents / Validity (Litigation)

Supreme Court Affirms Clear and Convincing Standard of Patent Invalidity Proof

By Jeremiah Armstrong and Paul Devinsky

Delivering what is likely the final blow to its battle against a $240 million infringement judgment, the Supreme Court of the United States unanimously rejected Microsoft's plea to modify the clear and convincing evidence standard of proof required to invalidate a patent. Microsoft v. i4i, Case No. 09-1504 (Supr. Ct., June 9, 2011) (Justice Sotomayor) (Justices Breyer and Thomas, concurring).

The appeal stems from a 2009 jury verdict that certain versions of Microsoft Word were found to infringe plaintiff i4i's patent related to editing and formatting XML documents. Microsoft challenged the validity of the patent, based on the §102(b) on-sale bar, citing i4i's sales of a software product called S4 more than a year before applying for the asserted patent. The S4 product was never presented to the U. S. Patent and Trademark Office (USPTO) examiner.

The U.S. Court of Appeals for the Federal Circuit squarely rejected Microsoft's argument that the jury should have been instructed to apply a preponderance of the evidence standard of proof to the issue of patent invalidity. The Federal Circuit also rejectedMicrosoft's request to reduce the willful damages award, partially due to Microsoft's failure to file a pre-verdict judgment as a matter of law (JMOL).

History

Microsoft petitioned the Supreme Court for certiorari to consider whether an accused infringer that challenges patent validity based on prior art not considered by the USPTO during prosecution must overcome the 35 U.S.C. §282 presumption of validity by "clear and concurring evidence" or whether some lower standard of proof will suffice (see IP Update, Vol. 13, No. 12).

The "clear and concurring" standard of proof has been used by Federal Circuit since its pronouncement in the seminal 1984 case, American Hoist & Derrick v. Sowa & Sons. Prior to the 1982 establishment of the Federal Circuit, most of the regional courts of appeal applied the less differential "preponderance" standard to the issue. However, the Federal Circuit, in setting its rule, took note of the "the deference that is due to a qualified government agency presumed to have properly done its job."

Microsoft, in its certiorari petition, was supported for review of the Federal Circuit standard of proof by 11 amici representing major corporations, law professors and trade associations. Most of the amici faulted the deference given to the USPTO examiners who have limited time and resources for the examination of any particular application, who examine applications on a strictly ex parte basis and who only infrequently consider non-patent prior art publication or prior products. The amici also note that juries already tend to give undue deference to the decision of the USPTO in issuing a patent, especially in cases where the technology is complex.

Microsoft and the amici characterized the Federal Circuit rule as inflexible and another "bright line" test, a characterization that has resulted in the reversal of several Federal Circuit rulings in recent history, including the KSR obviousness case; a case in which the Supreme Court, in dicta, noted that the rational for showing deference to the USPTO was "much diminished" where the prior art in issue was not before the examiner.

Supreme Court Decision

In its analysis, the Supreme Court considered whether §282 established the standard of proof for invalidity as requiring clear and convincing evidence given the statutory language that a "patent shall be presumed valid" and "[t]he burden of establishing invalidity ... rest[s] on the party asserting such invalidity." While §282 does not explicitly state an invalidity standard, the Supreme Court explained that the language used when the statute was enacted in 1952 was synonymous with the clear and convincing evidence standard that was part of the recognized common law, as described by Justice Cardozo in Radio Corp. of America v. Radio Engineering Laboratories, Inc. Accordingly, the Supreme Court deferred to the opinion of Judge Rich, a primary author of the 1952 Patent Act, in American Hoist & Derrick, where he wrote that under §282 the "burden is constant and never changes and is to convince the court of invalidity by clear evidence."

The Supreme Court said this strict invalidity standard always applies, even when evidence before the fact-finder was not previously available to the USPTO during the examination process: "[H]ad Congress intended to drop the heightened standard of proof where the evidence before the jury varied from that before the PTO—and thus to take the unusual and impractical step of enacting a variable standard of proof that must itself be adjudicated in each case —we assume it would have said so expressly."

However the Supreme Court did suggest the use of tailored jury instructions: "When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting the patent" and "may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence."

Notably, the Supreme Court recognized that new evidence not considered by the USPTO during examination—like the S4 software product in issue here—may "carry more weight" at trial (i.e., "the challenger's burden to persuade the jury of its invalidity defense by clear and convincing evidence may be easier to sustain") and, citing its earlier KSR decision, conceded that where prior art was not before the USPTO, "the rational underlying the presumption—that the PTO, in its expertise, has approved the claim—seems much diminished." As the Supreme Court explained, "if the PTO did not have all of the material facts before it, its considerable judgment may lose considerable force. And, concomitantly, the challenger's burden to persuade the jury of its invalidity defense by clear and convincing evidence may be easier to sustain."

Patents / Active Inducement

Actual Knowledge an Element of § 271(B) Inducement, but Willful Blindness Will Suffice

By Paul Devinsky and Brock Wilson

The Supreme Court of the United States essentially affirmed the Federal Circuit in ruling (8-1) that induced infringement under 35 U.S.C. §271(b) requires knowledge that the induced acts constitute patent infringement, but that one cannot escape liability through "willful blindness" that a copied product is patented. However, the Supreme Court did reject the Federal Circuit's "deliberate indifference" standard as a substitute for knowledge. Global-Tech Appliances Inc. v. SEB S.A., Case No. 10-6 (Supr. Ct. May 31, 2011) (Justice Alito) (Justice Kennedy, dissenting).

In upholding the Federal Circuit but rejecting the "deliberate indifference" standard, the Supreme Court held that the evidence presented at trial was sufficient to find liability for induced infringement under a theory of "willful blindness," even though there was no evidence that the defendant had actual knowledge of the asserted patent prior to the filing of the lawsuit. In so holding, the Supreme Court noted that the inducement statute, §271(b), and the contributory infringement statute, §271(c), both stem from the same contributory infringement precedent and that, based on that precedent, both require knowledge that the acts complained of constitute patent infringement, which includes knowledge of the patent. As explained by the Supreme Court, "[t]he two provisions have a common origin in the pre-1952 understanding of contributory infringement, and the language of the two provisions creates the same difficult interpretive choice. It could thus be strange to hold that knowledge of the relevant patent is needed under §271(c) but not under §271(b)."

Willful Blindness

The Supreme Court then turned to whether the knowledge requirement could be satisfied by something less than actual knowledge and, if so, what the level of that knowledge should be. Looking at criminal case law, the Supreme Court focused on cases in which other courts have held statutes requiring proof that a defendant acted willfully or knowingly to be satisfied—even though the defendant lacked actual knowledge—because the defendant "deliberately shield[ed] themselves from clear evidence of critical facts that are strongly suggested by the circumstances." Adopting a similar standard, the Supreme Court concluded that "[g]iven the long history of willful blindness and its wide acceptance in the Federal Judiciary, we can see no reason why the doctrine should not apply in civil lawsuits for induced patent infringement under 35 U.S.C. §271(b)."

Having established willful blindness as the threshold for the knowledge requirement to satisfy induced infringement liability, the Supreme Court set forth two "basic components for willful blindness: (1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact."

The Supreme Court then distinguished this willful blindness from the even lower threshold of "deliberate indifference," i.e., the test applied by the Federal Circuit, concluding that deliberate indifference "permits a finding of knowledge when there is merely a 'known risk' that the induced acts are infringing," and it does "not require active efforts by an inducer to avoid knowing about the infringing nature of the activities." In comparison to the willful blindness test which stems from criminal law, the deliberate indifference test is more akin to simple negligence.

Applying the willful blindness standard to the facts of the case, the Supreme Court found that the evidence in the present case, taken cumulatively (including evidence that defendant reverse-engineered a foreign, unmarked product of its competitor, copied it and sold it as its own; that defendant commissioned a "right-to-use" study, but did not inform the commissioned lawyer that the product was copied; that defendant's president was well-versed in U.S. patent law and was a named inventor on 29 patents; and testimony that supported an inference that the defendant did not inform the commissioned attorney the product was copied in order to manufacture a claim of plausible deniability) could support a jury finding "that [defendant] subjectively believed there was a high probability that [plaintiff's product] was patented, that [defendant] took deliberate steps to avoid knowing that fact, and that it therefore willfully blinded itself to the infringing nature of [its customer's] sales."

Dissent

In dissent, Justice Kennedy wrote that even willful blindness is not enough to satisfy the knowledge requirement of §271(b). "Willful blindness is not knowledge and judges should not broaden a legislative prescription by analogy." Justice Kennedy warned that this case could have serious repercussions in terms of criminal cases that involve a knowledge requirement.

Patents / Bayh-Dole

Even Under Bayh-Dole, Employee Inventor Has First Dibs

By Paul Devinsky

In its second affirmance of a Federal Circuit decision in the span of two weeks, the Supreme Court of the United States, in a blow to the university technology transfer world, held (7-2) that federal contractors do not have an automatic right to claim title to inventions. The statutory rights of the inventor, even in the case of federally funded research, trumps the Bayh-Dole vesting provision. Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Case No. 09-1159, 563 U.S. ____ (June 6, 2011) (Chief Justice Roberts) (Justice Sotomayor, concurring) (Justice Breyer and Justice Ginsburg, dissenting).

The Bayh-Dole Act dates back to 1980 and is acknowledged to be largely responsible for the vast increase in university licensing of the fruits of federally funded research. In the present case, the issue is raised as to whether the patent rights ownership provision of Bayh-Dole immediately vests ownership in a federally funded invention in the contractor, in this case Stanford University. (See Cert Alert, IP Update, Vol. 13, No. 11) The Supreme Court has now answered that it does not. While Bayh-Dole clarifies the priority of allocation of rights as between the government and the contractor—all ownership rights stem initially from the inventor.

Background

Stanford sued Roche for infringement of three patents that claim methods for using the polymerase chain reaction (PCR) to measure the amount of HIV in blood samples and using those measurements to infer the effectiveness of antiretroviral drugs.

The standing question arose because Mark Holodniy, one of the named inventors of the patents, signed multiple contracts defining his obligations to assign his invention rights. First, upon joining Stanford, Holodniy signed a Copyright and Patent Agreement (CPA) in which he agreed "to assign or confirm in writing to Stanford and/or Sponsors that right, title and interest in" any inventions he conceived of or first reduced to practice. At the behest of Stanford, however, Holodniy also visited Cetus Corp., a company collaborating with Stanford, to acquire background knowledge about PCR technology. In doing so, Holodniy signed a Visitor's Confidentiality Agreement (VCA) with Cetus, which stated, "I will assign and do hereby assign to CETUS, my right, title, and interest in each of the ideas, inventions and improvements" (emphasis added).

In 1991 Roche purchased Cetus's PCR business, including its agreements with Stanford and its researchers, and began making HIV detection kits. In 1992 Stanford filed the patent application to which the three patents-in-suit claim priority. After extensive negotiations between the two entities, Stanford filed suit against Roche in 2005. In its defense, Roche alleged, inter alia, that it possessed ownership rights in the patents-at-issue and that Stanford therefore lacked standing. In response, Stanford argued that it was a bona fide purchaser and that the Bayh-Dole Act superseded any transfer of rights from Holodniy to Cetus.

The Federal Circuit Decision

The Federal Circuit found that Stanford did not possess standing to sue for infringement of the patents-in-suit because the CPA between Stanford and Holodniy was merely a promise to assign, while the VCA was a present transfer of Holodniy's future inventions to Cetus (see IP Update, Vol. 12, No. 10). Thus, according to the Federal Circuit, "Cetus immediately gained equitable title to Holodniy's inventions" and any subsequent assignment to Stanford was negated. The Federal Circuit also dismissed Stanford's claim that it was a bona fide purchaser. Because "[a]n organization can be charged with notice of its employees' assignments," the Court found that "Stanford had at least constructive or inquiry notice of the VCA." Therefore, Stanford did not qualify as a bona fide purchaser. Finally, the Federal Circuit rejected Stanford's argument that "the Bayh-Dole Act negated Holodniy's assignment to Cetus because it empowered Stanford to take complete title to the inventions." Rather, the Federal Circuit concluded that while Bayh-Dole empowers the government to take title to certain inventions under specified circumstances, it neither "automatically void[s] ab initio the inventors' rights in government-funded inventions" nor "voids prior contractual transfers of rights." Similarly, "claiming title under Bayh-Dole does not override prior assignments." Stanford sought and was granted certiorari by the Supreme Court.

The Supreme Court

The Supreme Court explained that since its genesis, U.S. patent laws have "operated on the premise that rights in an invention belong to the inventor" and that Bayh-Dole does not "displace" that norm and "automatically" vest title to federally funded inventions in federal contractors.

Specifically, the Supreme Court rebuffed the argument posed by Stanford (and supported by the United States as amicus curiae) that Bayh-Dole reorders the normal priority of rights in an invention conceived or first reduced to practice in the course of federally funded research by vesting title in such inventions to the federal contractor, i.e., the inventor's employer. As concluded by the Supreme Court, "nowhere in the Act are inventors deprived of their interest in federally funded inventions. Instead the Act only provides that contractors may elect to retain title to any subjection invention" (emphasis added).

According to the provision of Bayh-Dole, granting a right to "elect" confirms that the act does not vest title. Rather, as explained by Chief Justice Roberts (writing for the majority), at the time of conception, rights to an invention lie with the inventor:

Although much in intellectual property law has changed in the 220 years since the first Patent Act, the basic idea that inventors have the right to patent their inventions has not. Our precedents confirm the general rule that rights in an invention belong to the inventor. It is equally well established that an inventor can assign his rights in an invention to a third party. Thus, although others may acquire an interest in an invention, any such interest—as a general rule—must trace back to the inventor.

In accordance with these principles, we have recognized that unless there is an agreement to the contrary, an employer does not have rights in an invention 'which is the original conception of the employee alone.' Such an invention 'remains the property of him who conceived it.' In most circumstances, an inventor must expressly grant his rights in an invention to his employer if the employer is to obtain those rights.

Dissent and Concurrence

Justice Breyer, joined by Justice Ginsburg, dissented. Quoting the order granting cert, Justice Breyer noted "the question presented is whether rights in inventions arising from federally funded research can be terminated unilaterally by an individual inventor through a separate agreement purporting to assign the inventor's rights to a third party."

In the view of the dissent, "the answer to this question is likely no. But because that answer turns on matters that have not been fully briefed (and are not resolved by the opinion of the Court) [Justice Breyer] would return this case to the Federal Circuit for further argument."

The dissent explained that Congress enacted Bayh-Dole "against a background norm that often, but not always, denies individual inventors patent rights growing out of research for which the public has already paid. This legal norm reflects the fact that patents themselves have both benefits and costs." Citing back to the letters of founding fathers Jefferson and Madison to the effect that patent monopoly was a "compensation" for the "community benefit" that a patent bestowed, Justice Breyer explained "the importance of assuring this community 'benefit' is reflected in legal rules that may deny or limit the award of patent rights where the public has already paid to produce an invention, lest the public bear the potential costs of patent protection where there is no offsetting need for such protection to elicit that invention. Why should the public have to pay twice for the same invention?"

Justice Sotomayor agreed with the majority but only because Stanford didn't raise the issues raised in the dissent. She noted her understanding that "the majority opinion [would] permit consideration of these arguments in a future case."

Patents / Inequitable Conduct

Federal Circuit Ratchets Up Materiality Requirement for Inequitable Conduct

By Mary Boyle, Ph.D. and Paul Devinsky

In a decision likely to please practitioners involved in patent prosecution as well as patent owners, a divided U.S. Court of Appeals for the Federal Circuit issued its en banc ruling addressing the legal standard for inequitable conduct. Citing the rampant overuse and unintended consequences of the doctrine, the court imposed a new, heightened standard for materiality. Therasense, Inc. v. Becton Dickinson & Co., Case No. 08-1511 (Fed. Cir., May 25, 2011) (en banc) (opinion for the court by Rader, C.J., joined by Judges Newman, Lourie, Linn, Moore and Reyna) (O'Malley, J., concurring-in-part and dissenting-in-part) (Dyson, J., dissenting, joined by Judges Gajarsa, Dyk and Prost).

A deeply divided (6-1-4) Federal Circuit revised the materiality prong of the inequitable conduct defense, which permits a patent infringer to argue that an entire patent (as well as related patents and patent applications) should be declared unenforceable in light of the patentee's wrongful conduct during patent prosecution. Six judges joined in the entirety of the court's opinion. A seventh judge joined part of the court's opinion discussing intent and wrote a separate opinion concurring-in-part and dissenting-in-part as to the materiality standard. The remaining four judges dissented in a lengthy opinion.

In the trial court, the district judge found inequitable conduct based on failure to disclose to the U.S. Patent and Trademark Office (USPTO) that contradictory statements had been made in a different proceeding. The patent-in-suit is for test strips with an electrode and reactant system used to measure blood sugar in diabetic patients. Measurements of blood sugar can be made either from whole blood samples or from other types of samples. The issue involved whether a person of ordinary skill in the art would understand that an electrode system for use with whole blood must have a membrane to protect the electrode. According to an earlier patent, strips to test whole blood samples "optionally, but preferably" had a membrane. In European patent proceedings, the patent owner argued that the language "optionally, but preferably" meant a membrane was not required, i.e., it was optional. In the USPTO, the patent owner submitted a sworn declaration and supporting argument stating that the language "optionally, but preferably" in the prior art patent would be read by a person of ordinary skill to mean that a membrane was required, i.e., it was not optional. The declaration submitted to the USPTO was in direct response to concerns expressed by the examiner. The patent owner never disclosed the statements that were made in the European proceeding to the USPTO. The trial court found specific intent to deceive the USPTO and that the contradictory statements were material, and ruled that the patent-in-suit was unenforceable.

New "But for" Standard for Materiality

The Federal Circuit reiterated that the law of inequitable conduct relating to nondisclosure continues to require two separate showings: specific intent to deceive and materiality. The burden of proof that the accused infringer must meet is still clear and convincing evidence.

As articulated by the majority, the intent requirement remains unchanged. Specifically, the proper standard for intentional nondisclosure is "knowing and deliberate," although the majority concedes that some cases had incorrectly suggested that a negligence-type, "should have known" intent standard was sufficient. In the words of the Court, the intent requirement requires "clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it." When circumstantial evidence of intent is used, intent to deceive must be the most reasonable inference.

It is the materiality standard that has never been radically changed. Prior to Therasense, the Federal Circuit had developed a materiality standard that was based on the USPTO's Rule 56, which sets forth disclosure standards for lawyers and others involved in patent prosecution. The Therasense opinion jettisons that approach. The Court rejected the current version of Rule 56, which provides that information is "material" if it is noncumulative and "refutes, or is inconsistent with, a position the applicant takes in opposing an argument of unpatentability relied on by the [USPTO], or asserting an argument of patentability" as setting "such a low bar for materiality" that it encourages the existing and problematic practice of dumping prior art of marginal relevance on the USPTO during patent prosecution.

After Therasense, the legal standard for materiality is not tied to the Rule 56. Instead, if an applicant has failed to disclose prior art to the USPTO, the trial court will be required to determine whether the undisclosed art meets a "but for" materiality test, which means that the USPTO would not have allowed a patent claim if it had been aware of the undisclosed prior art. To make that determination, the trial court is instructed to apply a preponderance of the evidence standard and give claims their broadest reasonable construction, i.e., apply the evidentiary standards that the USPTO would have used to decide whether the prior art rendered the claim unpatentable. This is an appropriate standard, the Court explained, because it looks to whether the patentee actually reaped an unfair benefit by its wrongful failure to disclose.

Exceptions for Egregious Conduct

The Court's opinion sets up an exception to the new "but for" standard in cases of "affirmative egregious conduct." The Court recognized that the "but for" test would not, by itself, be adequate to capture all cases of egregious and abusive conduct. This exception, the Court stated, incorporates elements of early "unclean hands" cases from the Supreme Court of the United States, which dealt with egregious misconduct. Using this exception, the majority believes it will achieve the necessary balance between encouraging honesty and curtailing the excessive use of the inequitable conduct defense, often referred to as a "plague." While the Court used the specific example of a false affidavit to illustrate the exception, the Court indicated the exception was not so limited, but rather is intended to ensure the materiality standard had sufficient flexibility to capture and punish abusive conduct.

The Majority's Rationale

The Federal Circuit's Therasense opinion plainly states that this change in the law was made out of necessity to address "the problems created by the expansion and overuse of the inequitable conduct doctrine." Over time, the intent and materiality standards for proving inequitable conduct were lowered to encourage full disclosure to the USPTO. "This new focus on encouraging disclosure has had numerous unforeseen and unintended consequences." The inequitable conduct defense came to be raised in virtually every case, cabined only by the limits of attorney imagination to find "the slenderest grounds" to support a charge of inequitable conduct. The availability and overuse of this defense led to expanded discovery and increased litigation costs, discouraged settlement and diverted attention and resources from the merits of infringement and invalidity issues. "Perhaps most importantly, the remedy for inequitable conduct is the 'atomic bomb' of patent law," rendering whole patents, and in some cases, entire families of patents, unenforceable. "Left unfettered, the inequitable conduct doctrine has plagued not only the courts but also the entire patent system."

The Dissent

There is deep disagreement within the Court over the rule announced by the majority. The main group of four dissenters disagreed with the replacement of the Rule 56 standard. Those judges thought that long-standing precedent should not be overturned, and they would have made more limited changes to the legal standards, including a tightening of the intent element. They argued that, in other areas of law, a "but for" standard of materiality has been largely rejected, and that it had been repeatedly rejected by the Federal Circuit itself in cases involving inequitable conduct. Moreover, in their view, it is critical that the courts should continue to look to Rule 56, which encompasses the USPTO's considered view of what standard of conduct is needed and should govern the examination of patents. The dissenting group also expressed a belief that the higher standard for materiality will undermine the existing incentives to refrain from dishonesty before the USPTO. Indeed, they asserted, the "but for" test comes close to abolishing the doctrine of inequitable conduct altogether, since a finding of inequitable conduct will generally be made only after claims have been found invalid.

The other dissenter, Judge O'Malley, agreed that the old Rule 56 standard was inadequate, calling it, "too vague and too broad." On the other hand, Judge O'Malley objected that the new test was too narrow and too rigid. She supported a test that included the "but for" standard, but also deemed conduct to be material if it constitutes a false or misleading representation of fact, or was "so offensive that the court is left with a firm conviction that the integrity of the PTO process as to the application at issue was wholly undermined." Judge O'Malley also suggested that the remedy for inequitable conduct should not be limited to ruling that a whole patent is unenforceable. Rather, in Judge O'Malley's view the courts, in the exercise of their equitable powers, should have discretion to fashion an appropriate remedy.

Patents / Discovery

Rambus Encore: Duty to Preserve Documents for Litigation Clarified

By Paul Devinsky

Reconciling the opposite conclusions recited by two district courts on essentially identical facts, the U.S. Court of Appeals for the Federal Circuit has clarified when a litigant is under a duty to preserve documents at risk of committing spoliation. Micron Technology v. Rambus, Inc., Case No. 09-1263 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part); Hynix Semiconductor, Inc. v. Rambus, Inc., Case No. 09-1299; -1347 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part, joined by Newman, J.). In these cases, the Federal Circuit concluded that Rambus improperly destroyed millions of pages of documents in advance of litigation, handing the technology licensing giant a major setback in its patent enforcement program.

Rambus licenses patents that relate to enhanced performance memory chips. Most of Rambus cash flow is from patent licensing revenue. Rambus initiated its first enforcement action in 2000, slightly before Micron and Hynix initiated declaratory judgment actions against it, seeking declarations of invalidity, non-infringement and unenforceability. In advance of its enforcement actions against Micron or Hynix, Rambus, in 1999, conducted what has been termed "shred days" or a "shred party," during which millions of pages of documents were destroyed. In the Micron case, the district court (Delaware) concluded that Rambus had engaged in spoliation of documents that related to its patent licensing program and ordered dismissal of the action against Micron as a sanction. The district court did so after concluding that litigation was reasonably foreseeable (to Rambus) by the end of 1998.

In the Hynix case, the district court (ND Ca) concluded that litigation was not foreseeable (to Rambus) at the time of the shredding and so found that there was no spoliation. In the opinion of Hynix court, litigation must be "immediate" or "certain" to be foreseeable.

In the present appeal the Federal Circuit was called upon to resolve the issue of when litigation was foreseeable and so a duty to preserve documents arose. Rambus urged the Court to adopt a standard whereby a party would be obligated to preserve documents only when litigation became "probable."

In the Micron case, the Federal Circuit affirmed the district court ruling that spoliation had occurred but reversed the district court on the sanction of dismissal and remanded the case for reconsideration of that sanction. The Federal Circuit left it to the district court to determine, based on the totality of the circumstances, the date the duty to preserve arose, but the Federal Circuit did conclude that the duty to preserve did arise prior to the August 1999 shred day and that spoliation had occurred. In terms of the circumstances to be considered (under the totality of circumstances test), the Federal Circuit cited facts such as Rambus' knowledge of the potentially infringing activity (of Micron), as well as the steps it had taken in furtherance of litigation such as selecting forums, prioritizing targets and creating claim charts. The Court noted that for Rambus, litigation was "an essential element of its business model."

As part of the remand, the Federal Circuit instructed the Delaware district court to make a determination on the issue of bad faith and to re-assess its finding of prejudice, i.e., in terms of whether, independent of the propriety of Rambus' document destruction, the shredding had an impact on the ability of potential defendants to defend themselves. In reversing the dismissal sanction, the Federal Circuit instructed the district court to reassess the sanction based on the degree of bad faith and prejudice it found and whether there was another, lesser sanction that would be sufficient.

In the Hynix appeal, the Federal Circuit reversed the district court, concluding that the standard of foreseeability used in that case ("imminent or probable, without significant contingencies") was too narrow and that even if there are contingencies, so long as their resolution is "reasonably foreseeable," the litigation is also reasonably foreseeable. The district court was instructed, on remand, to determine (under the same totality of the circumstances test) when Rambus' duty to preserve arose and whether Hynix was entitled to relief.

Attorney-Client Privilege and Crime-Fraud Exception

The Federal Circuit agreed with both district courts that even though the evidence used to advance the spoliation argument was subject to an attorney-client privilege, that privilege was "pierced" by the crime-fraud exception since the communications in issue were in furtherance of a violation of a destruction of evidence statute (notwithstanding Rambus' argument that the California statute in question only applied where there was "immediacy of temporal closeness" between the time the destruction occurred and the time set for document production). The Court rebuffed Rambus' argument, noting that it would make "no sense" given Rambus' control of the timing of events, to permit a party to intentionally destroy evidence and then just wait some "arbitrary period of time" before filing suit to avoid the consequences of the crime-fraud exception.

Patents / Non-obviousness and Analogous Art

Analogous Art Must Address the Entire Problem Solved by the Patent

By Hasan Rashid and Blake Wong

The U.S. Court of Appeals for the Federal Circuit has interpreted the analogous art doctrine narrowly in an obviousness analysis, concluding that all the art relied on by the U.S. Patent and Trademark Office (USPTO) was non-analogous art with respect to the claimed invention. In re Klein, Case No. 10-1411 (Fed. Cir., June 6, 2011) (Schall, J.).

The invention in issue is a device for mixing sugar and water in configurable ratios to create nectar for different birds and butterflies. The device includes a pitcher for holding liquids and a movable divider separating the pitcher into a sugar and a water section. The movable divider varies the sizes of the two sections, adjusting the ratio of sugar and water based on whether the user is feeding the nectar to hummingbirds, orioles or butterflies. Once the bird is chosen and the movable divider is set, the user then fills the sections with sugar and water and lifts the divider to mix the ingredients into nectar.

Using five prior art references, the USPTO upheld an obviousness rejection. Three of the references were directed to movable dividers for separating solid objects, as in a drawer or cabinet. The other two references were directed to immovable partitions for separating liquids to be mixed.

The inventor argued that the five references were not analogous art and that the references could not be applied to render the claimed invention obvious. The Board of Patent Appeals and Interferences disagreed, finding that the five references were reasonably pertinent to the problem of "making a nectar feeder with a moveable divider to prepare different ratios of sugar and water for different animals." Klein appealed.

The Federal Circuit reversed, concluding that the five references were not analogous with regard to the claimed invention because they did not address the entire problem addressed by the invention. Although the first three references described movable dividers, the dividers separated solid objects and not liquids. Similarly, although the last two references described dividers that separated liquids, the dividers were immovable. Thus, the Court concluded that the cited references were not related to solving the entire problem of "making a nectar feeder with a moveable divider to prepare different ratios of sugar and water for different animals."

Practice Note: The Federal Circuit decision did not cite to the Supreme Court's 2007 KSR decision, which focused on the question of obviousness and which speaks to the issue of analogous art. Nevertheless, In re Klein will likely be often cited to the USPTO in support of the argument that analogous art must be directed towards the entire problem addressed by the patent, not just pieces of the problem.

To read Part 2 of this article click "Next Page" below.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.