Edited by Paul Devinsky and Rita Weeks
Patents / Claim Construction
For Infringement Purposes, Preamble Can Define a Limiting
Environment Rather than a Claim Limitation
By Ryan N. Phelan
The U. S. Court of Appeals for the Federal Circuit has explained that terms of a patent claim preamble can define a limiting "environment." Such terms of the limiting environment may be performed or met by third parties, setting the stage for infringement by parties accused of practicing the limitations of the claim body. Advanced Software Design Corp. v. Fiserv, Inc., Case Nos. 09-1585, 10-1011 (Fed. Cir., June 2, 2011) (Bryson, J.).
Advanced Software Design and Fiserv offer competing products that generally work by encrypting selected information on a check, e.g., the name of the payee or the amount to be paid, and printing the encrypted information on the check. The information is later used to validate whether the check is legitimate rather than fraudulent or forged. A key feature of Fiserv's products was that its products performed only the validation feature and not the related encrypting or printing features.
Advanced Software Design sued Fiserv for patent infringement of its patents directed to guarding against check fraud and forgery. Following discovery and claim construction, one asserted patent remained. Fiserv filed a summary judgment motion for non-infringement based, in part, on its position that it did not practice all of the steps of the asserted claims requiring each of "encrypting," "printing" and "validating" of checks. The district court granted Fiserv's motion, in part, based on its finding that Fiserv did not direct or control "encrypting" or "printing" steps and, therefore, could Fiserv could not directly infringe the patent.
However, the "validating" step was the only step of the three steps at issue discussed in the body of the asserted claims. The "encrypting" and "printing" steps were found in the preamble. Nonetheless, the district court construed the "encrypting and "printing" steps as limiting, adopting Fiserv's position that each of these steps must be performed by the accused infringer. Advanced Software Design appealed.
The Federal Circuit reversed, concluding that while the preamble's encrypting and printing steps were limiting, the limitation only defines the "environment in which the accused infringer must practice the [invention]." The Court found its earlier decision in Uniloc USA instructive: "[l]ike the claim in Uniloc, the claims at issue in this case contain preambles that define the environment in which an accused infringer must act or describe capabilities that an accused device must have."
There remained an issue of material fact as to whether Fiserv, or its products, practiced the "validating" step found in the body of the asserted claim. On this issue, the Court stated that "[f]or infringement purposes, the preamble steps need not be performed by the system or the party that uses the system." Focusing on an exemplary claimed, the Court noted that the claim covers a "'process for validating a negotiable financial instrument' comprising reading information from the check and decrypting or re-encrypting to validate the check. Fiserv therefore could 'use' the [claimed] method ... by validating checks even though it does not encrypt and print them. It would infringe the [claimed] method ..., however, only by validating checks that have been encrypted and printed in accordance with steps described in the preamble."
Patent / Declaratory Judgment Standing
Vendor's Economic Injury Is Insufficient to Establish DJ
Jurisdiction, but Implicit Claim of Contributory Infringement Is
Enough
By Christina A. Ondrick
The U.S. Court of Appeals for the Federal Circuit has now ruled that a supplier vendor has standing to commence a declaratory judgment action if a patent holder accuses the supplier's customers of direct infringement and if the supplier's product functions as a material component in the allegedly infringing system or the supplier's product is used in the performance of the allegedly infringing method. Arris Group v. British Telecommunications PLC, Case No. 10-1292 (Fed. Cir., May 19, 2011) (Dyk, J.).
Arris makes and sells cable telephony and data products for use in networks with Voice over Internet Protocol (VoIP) telephone services. British Telecommunications (BT) sent Arris' customer, Cable One, a letter accusing Cable One's network of infringing various system and method claims of the patents-in-suit. Licensing discussions ensued. BT sent Cable One a 118-page presentation comparing the patent claims to Cable One's network, which included repeated identification of Arris' products as meeting certain system claim elements and steps of the method claims. BT's presentation identified Cable One (not Arris) as a direct infringer. Thereafter, at Cable One's request, Arris became involved in the licensing discussions. BT offered Cable One a license but declined to license Arris. Arris filed a declaratory judgment action against BT; the district court dismissed the action, finding that Arris lacked standing because there was no case or controversy between Arris and BT. Arris appealed.
The Federal Circuit rejected Arris' argument that case or controversy exists because Arris has suffered an economic injury as a result of BT's infringement threats. The Court held that a mere adverse economic interest was insufficient to create declaratory judgment jurisdiction and that the Supreme Court's MedImmune decision did not alter the prior law in this regard. What is required to establish jurisdiction is an adverse legal interest of sufficient immediacy and reality. However, the Federal Circuit found an adverse legal interest because BT implicitly asserted that Arris contributorily infringed the BT patents when it accused Cable One of direct infringement. Arris' products were "central" to the BT's direct infringement allegations against Cable One and, for many of the asserted claims, BT identified Arris' products as meeting virtually all of the claim elements. The Court further found that, at a minimum, BT identified Arris' products as satisfying at least one central element of every asserted claim. BT allegations that Arris' products complied with industry standards also suggested that Arris' products were especially made or adapted for uses that infringe and are not staple articles of commerce. Other relevant factors to the Court's conclusion included Arris' involvement in the prior licensing negotiations, as well as BT's refusal to grant Arris a covenant not to sue.
Practice Note: The "central" nature of Arris' products in the infringement allegations entitled the Court to finding that standing existed. However, the nature and quantity of contacts between the Arris and BT also strongly supported the Court's conclusion. Patent holders seeking to avoid declaratory judgment battles with indirect infringers should take care to minimize the nature of the allegations made about indirect infringers and should not rely on non-binding disclaimers that suppliers are not being accused of infringement.
Patents / Patent Exhaustion
Patent Exhaustion Still Applies when Licensees Fail to Pay
Royalties
By Hasan Rashid and Blake Wong
The U.S. Court of Appeals for the Federal Circuit has concluded that patent rights are exhausted even when the licensor has not received royalties under a patent license. Tessera, Inc. v. Int'l Trade Comm'n, Case No. 10-1176 (Fed. Cir., May 23, 2011) (Linn, J.).
Tessera licensed the patent in suit and required royalties from its licensees. However, some of Tessera's licensees sold products under the license without paying royalties on the sales. Tessera initiated an ITC action against Elpida, a downstream customer of these non-paying licensees.
Elpida asserted a patent exhaustion defense in the ITC. Elpida argued that Tessera may not recover damages because Tessera exhausted the patent rights when Tessera licensed the patent to the licensees. In response, Tessera argued that because some licensees failed to pay royalties, Tessera's patent rights had not been exhausted—although patent exhaustion prevents "double recovery," Tessera had not even received a "single recovery." After the ITC agreed with Elpida, Tessera appealed.
The Federal Circuit affirmed, focusing on a single question: did Tessera authorize the sales? In Quanta, the Supreme Court explained that the "patent exhaustion [doctrine] provides that the initial authorized sale of a patented item terminates all patent rights to that item." Thus, if the sales were authorized, then Tessera's rights were exhausted; if the sales were unauthorized, then Tessera's rights were not exhausted. The Court read the licenses to have authorized the licensees' sales. Specifically, Tessera had authorized its licensees to sell first, then pay royalties later. As the Court explained, nothing in the licenses converted the initially authorized sales into unauthorized sales upon nonpayment of royalties.
To hold otherwise would create an "absurd result" contrary to the purpose of the patent exhaustion doctrine. Namely, the doctrine "prohibit[s] postsale restrictions on the use of a patented article." The Court noted that Tessera should have pursued an action against its licensees, not those licensees' customers. For example, Tessera should have sued its licensees to recover for breach of contract for failing to pay royalties.
Patents / Obviousness
Endo Finds Pain Relief from Board's "Erroneous
Reasoning"
By Heather Morehouse Ettinger, Ph.D.
Reviewing a decision of the Board of Patent Appeals and Interferences (BPAI) finding of three patent applications directed to the pain relief formulation known as Opana® to be obvious, the U.S. Court of Appeals for the Federal Circuit affirmed the BPAI's decision in two of the applications, but vacated and remanded the BPAI decision in the third application. In re Kao, Case Nos. 10-1307 and -1308, and In re Ahdieh, Case No. 10-1309 (Fed. Cir. May 13, 2011) (Linn J.).
The three patent applications at issue concern controlled-release formulations of oxymorphone and are being pursued by Endo Pharmaceuticals in connection with its prescription pain tablets Opana® ER. The Court found that with respect two of three applications at issue, the BPAI's obviousness findings were supported by substantial evidence and that Endo's evidence of secondary consideration, namely the commercial success of Opana® ER, and showing of unexpected results were insufficient to rebut the prima facie showing of obviousness. However, with respect to the application for the formulation of Opana®, the Court found that the BPAI did not base the factual conclusions it used to find the claims obvious on substantial evidence, and therefore vacated and remanded that application.
The Court also found that the BPAI had erred by failing to give due weight to evidence of secondary considerations of non-obviousness of the claimed formulation. The Court reminded the BPAI that evidence of a secondary consideration, such as commercial success, does not need to be across the entire claimed range in order to be reasonably commensurate with the scope of the claims. However, the Court also noted that Endo, on remand, will need to show that the proffered secondary consideration, i.e. commercial success, results from something that is both claimed and novel in the claim. With respect to unexpected results, the Court advised the BPAI to consider on remand whether there is a nexus between the unexpected results and aspects of the claimed invention not already in the prior art.
Practice Note: The Federal Circuit considered the patentability of only one of two claims of the remanded application that it could have considered. The Federal Circuit reasoned that Endo had waived its right to have the two claims considered separately, both at the BPAI and at the Court, because Endo had failed to make separate, substantive arguments on the patentability each. To prevent such a waiver, applicants are advised (when possible) to provide clear statements separately asserting the patentability of the appealed claims.
Patents / Obviousness
In re Brimonidine Patent Litigation: Obviousness
Determinations Revisited
By Shilpa V. Patel, Ph.D.
The U.S. Court of Appeals for the Federal Circuit reversed-in-part and affirmed-in-part a district court finding of non-obviousness in a Hatch-Waxman litigation involving an improved brimonidine formulation for reducing intraocular pressure associated with glaucoma. Allergan Inc. v. Exela PharmSci Inc. and Apotex Inc., Case Nos. 10-1102, -1103 (Fed. Cir., May 19, 2011) (Bryson, J.) (Dyk, J., concurring-in-part, dissenting-in-part).
In 2001, Allergan introduced Alphagan® P brimonidine solution intended to address an allergic response in some patients to Allergan's Alphagan® brimonidine solution. Alphagan® P solution contains a lower concentration of brimonidine, higher pH and a solubility-enhancing component. Despite concern of possible oxidation of brimonidine, the Alphagan® P solution also contained stabilized chlorine dioxide (SCD) instead of benzalkonium chloride, a known eye irritant. After Exela and Apotex each submitted an Abbreviated New Drug Application (ANDA) for to the U.S. Food and Drug Administration (FDA) for marketing approval of a generic version of Alphagan® P brimonidine solution, Allergan alleged infringement of its patent directed to a buffered, aqueous ophthalmic solution and four related patents each directed to brimonidine-containing products. Following a bench trial, the district court found all of the asserted patents to be non-obvious. Apotex then stipulated to infringement and the district court entered an injunction. The defendants appealed.
On appeal, Apotex challenged the district court findings of non-obviousness. Apotex's invalidity argument relied on to prior art patents, Stockel and Ratcliff. Apotex argued that Stockel explicitly discloses the modifications that Allergan argues impart patentability (i.e., use of SCD as a preservative in an ophthalmic solution and that the desirability of an isotonic solution). Allergan argued that Stockel teaches away from the use of SCD as the only preservative because it would irritate the eye and recommends a combination of preservative agents. The Federal Circuit concluded that Stockel's teaching regarding the quantity of SCD does not undercut the strength of the teaching that physiologic pH and osmolality by use of buffer and tonicity components would have been simple and well-known modifications.
Apotex also argued that Ratcliff discloses an SCD solution and that the modifications that led to the claimed invention would have been obvious to a person of ordinary skill in the art. Allergan argued that Ratcliff requires activation of the disclosed SCD. The Federal Circuit disagreed with Allergan, noting that the claims in issue are directed to an SCD solution irrespective of its activation. The Court also stated that it would have been obvious to a person of ordinary skill in the art to create an ophthalmic solution that was adjusted to ocular pH and tonicity and that relied upon SCD as to sole preservative.
As to the four other related patents, Apotex argued that every asserted claim reads on a combination Refresh Tears® product and Alphagan® brimonidine solution, both owned by Allergan, and that such a combination would have been obvious to a person of ordinary skill in the art and faulted the district court for considering each asserted reference in isolation. The Federal Circuit, giving deference to the district court's weighing of testimony, concluded that the district court did not err in its factual determinations because the combination of Allergan's products would not have been an "anticipated success" and that a person of ordinary skill in the art would not have been expected to disregard the solvability and oxidation roadblocks caused by the prior art.
The Federal Circuit also reversed the district court's holding that Exela's product would infringe an Allergan patent. The Court distinguished the facts here from its holding as to when it is appropriate for a court to consider material outside the four corners of the ANDA to determine if an ANDA describes an infringing product. Here, neither Allergan nor Exela dispute that if Exela complies with its ANDA, Exela will never manufacture or sell a product at a pH falling within the asserted claims. Thus, the Court stated that it cannot assume that Exela will not act in full in compliance with its representations to the FDA.
Judge Dyk, in dissent, cited KSR and concluded that for the four related patents the "obvious to try" standard was met because a person of ordinary skill in the art would have been motivated to try a combination of Allergan's products to arrive at the claimed formulation. Judge Dyk engaged in a deep factual review of the record and concluded that the district court made erroneous fact findings that led it to determine that solubility and oxidation concerns would have deterred a person of ordinary skill from trying the combination of Allergan's products.
Patents / Injunction Bond
Wrongful Injunction Raises Presumption of Recovery of
Bond
By Whitney D. Brown and Christopher L. May
In a case of first impression, the U.S. Court of Appeals for the
Second Circuit ruled that wrongfully enjoined parties are entitled
to a presumption in favor of recovery against an injunction bond
for provable damages. However, the Court concluded that while
InterDigital contention that it deserves damages associated with a
stay of patent infringement action against Nokia has merit, the
case record was insufficient for appellate review. Nokia Corp.
v. InterDigital Inc. et al., Case No. 10-1358 (2d Cir., May
23, 2011) (Parker, J.).
The parties' dispute first arose at the International Trade Commission, where InterDigital alleged that Nokia had infringed its patents. In 2007, the ITC granted Nokia's motion to consolidate the investigation with a separate investigation filed by InterDigital against Samsung over the same patents. In December 2007, Nokia moved to stay the consolidated investigation, arguing that a pre-existing agreement between Nokia and InterDigital required arbitration. The ITC denied the motion, and Nokia then sued in federal district court. The district court granted Nokia's motion for a preliminary injunction in March 2008 and ordered InterDigital to stay or terminate the ITC proceedings against Nokia and submit to arbitration. The court required Nokia to post a $500,000 bond as a condition of obtaining the injunction.
The 2d Circuit subsequently vacated the injunction (see IP Update, Vol. 11, No. 8), and the district court dismissed Nokia's suit. Thereafter, InterDigital filed a motion in the district court to recover attorneys' fees and expenses incurred in moving to stay the ITC proceedings and preparing to arbitrate with Nokia. It asked to be awarded attorneys' fees and costs incurred as a result of litigating separate proceedings against Nokia and Samsung. The district court rejected InterDigital's request, finding that InterDigital had failed to show that the damages sought were "proximately caused" by the injunction. InterDigital appealed.
The 2d Circuit held that a wrongfully enjoined party is entitled to a presumption in favor of recovery, finding that the existence of such a presumption was implied by the text of Fed. R. Civ. Pro. 65(c), and that the First, Seventh, Ninth, Eleventh and D.C. Circuits followed similar rules. However, the court ruled that the improperly enjoined party must still show that any damages claimed were proximately caused by the injunction. Based on the lack of explanation by the district court for the denial of recovery, the 2d Circuit vacated the lower court's order and remanded the issue for reconsideration and clarification. However, the 2d Circuit noted that certain legal expenses, such as filing a motion to stay the ITC case with respect to Nokia that were ordered by the district court in its injunction order, should be recoverable absent a compelling reason otherwise.
Patents / Damages
No En Banc Rehearing for the 25 Percent Rule
By Leigh J. Martinson
By a vote of 10-1, the U. S. Court of Appeals for the Federal Circuit denied Uniloc's requests for a panel rehearing and for a rehearing en banc, respectively. Uniloc USA, Inc. and Uniloc Singapore Private Limited v. Microsoft Corporation, Case Nos. 10-1035, -1055 (Fed. Cir., May 16, 2011) (per curiam) (O'Malley, J., dissenting).
In January of 2011, the Court determined that evidence relying on the 25 percent rule of thumb is inadmissible under Daubert and the Federal Rules of Evidence because it fails to tie a reasonable royalty base to the facts of the case at issue (see IP Update, Vol. 14, No. 1). Thus, the Court held that as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation and should not be used.
Uniloc filed a combined petition for panel rehearing and rehearing en banc. The Court also granted leave to file amici curiae briefs to 10 damages experts, all of whom appeared pro se.
Now by a vote of 10-1, the Court denied both requests by Uniloc. Judge O'Malley dissented from the denial of the petition for rehearing en banc, but filed no separate opinion.
Cert Alert
Prometheus Rises Again
By Paul Devinsky
After having certiorari vacated and being remanded back to the Federal Circuit in the wake of decision of the Supreme Court of the United States in Bilski v. Kappos, (see "Bilski v. Kappos—Back Where We Started?"and to IP Update Vol. 12, No. 7) the Supreme Court has again granted certiorari in Mayo Collaborative Services v. Prometheus Labs., Inc., Supreme Court Case No. 10-1150 (June 20, 2011) to consider the patent eligibility of a claim directed to a medical diagnostic test.
On remand, the Federal Circuit (consistent with its initial decision in this case (see IP Update, Vol. 12, No. 9) concluded the subject matter claimed was "transformative" and therefore passed muster under 35 U.S.C. § 101. (See IP Update, Vol. 14, No. 1).
The question on which cert was granted is as follows:
Whether 35 U.S.C. § 101 is satisfied by a patent claim that covers observed correlations between blood test results and patient health, so that the claim effectively preempts all uses of the naturally occurring correlations, simply because well-known methods used to administer prescription drugs and test blood may involve "transformations" of body chemistry.
A similar issue was considered by the Supreme Court several years ago when it granted cert in Laboratory Corp of America v. Metabolite Laboratories, but after full briefing and oral argument, cert was dismissed as having been improvidently granted and no decision was rendered. (See "U.S. Supreme Court Dismisses LabCorp's Petition at the Eleventh Hour".)
Trademarks / Injunctive Relief
eBay Standard Applies to Preliminary Injunctions in
Trademark Cases
By Matthew McCloskey
Considering whether requests for preliminary injunctions against alleged trademark infringement are subject to the traditional equitable principles set forth by the Supreme Court of the United States in eBay v. MercExchange, the U.S. Court of Appeals for the First Circuit vacated the district court's grant of preliminary injunction to a trademark owner. Voice of the Arab World, Inc. v. MDTV Medical News Now, Inc., Case No. 10-1396 (1st Cir., May 27, 2011) (Torruella, J.).
Voice of the Arab World filed an action against MDTV Medical News Now in the District Court of Massachusetts, seeking a declaratory judgment that the plaintiff's use and registration of the mark "MDTV" did not infringe on the defendant's trademark rights. After filing counter claims, including one alleging trademark infringement, the defendant moved to preliminarily enjoin the plaintiff from using the MDTV mark. After the district court granted the preliminary injunction, the plaintiff appealed to the 1st Circuit.
The plaintiff challenged the district court's preliminary injunction order on three grounds. First, the plaintiff argued that the district court erred in finding that the defendant demonstrated a likelihood of success on the merits of its trademark infringement claim. Second, the plaintiff alleged that the lower court erred as a matter of law by presuming that the defendant would likely suffer irreparable harm in the absence of preliminary injunctive relief and in not requiring the defendant to actually demonstrate such likelihood of irreparable harm. Third, the plaintiff argued that even if a preliminary injunction was appropriate, the district court abused its discretion by issuing an overly broad injunction.
The plaintiff's argument concerning irreparable harm was two-fold. First, the plaintiff argued that presuming irreparable harm in trademark infringement cases where preliminary injunctive relief is sought is inconsistent with the Supreme Court's 2006 decision in eBay Inc. v. MercExchange, L.L.C. In the alternative, the plaintiff contended that even if irreparable harm is properly presumed in certain trademark infringement cases, such a presumption could not apply in this case due to the defendant's excessive delay in seeking injunctive relief.
Citing eBay, which dealt with a request for permanent injunction in a patent infringement case, the court held that a request to preliminarily enjoin alleged trademark infringement is subject to the traditional equitable principles delineated in eBay. Specifically, the court reiterated the eBay holding that "the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards." In recognizing that eBay properly applies to non-patent cases, the court noted that "it is significant that the Court in eBay supported its formulation of the traditional four-factor permanent injunction standard by citing cases that were unrelated to patent law." The court also recognized that "nothing in the Lanham Act indicates that Congress intended to depart from traditional equitable principles," noting, "like the Patent Act, the Lanham Act provides a court the 'power to grant injunctions, according to principles of equity and upon such terms as the court may deem reasonable, to prevent[,]' among other things, trademark infringement and domain name cybersquatting" citing 15 U.S.C. § 1116(a) (emphasis supplied). The court stated that the fact that eBay dealt with a permanent injunction did not change the conclusion that the its principles are equally applicable in the context of preliminary injunctions.
Copyright Infringement / Jurisdiction
Second Circuit Revives Copyright Infringement Suit Against
Non-Resident for Uploading Copyrighted Material Online
By Rita Weeks
Employing the standard set out by the New York Court of Appeals in internet copyright infringement cases, the U. S. Court of Appeals for the Second Circuit has revived a copyright infringement suit brought by a New York resident against a non-resident based upon defendant's alleged uploading of copyrighted materials onto the internet. Penguin Group (USA) Inc. v. American Buddha, Case No. 09-1739 (2d Cir., May 12, 2011) (per curiam).
Plaintiff Penguin Group, a New York book publisher, sued defendant American Buddha, an Oregon corporation located in Arizona, for copyright infringement, in New York. Penguin Group alleged that American Buddha published complete copies of four of the plaintiff's books on American Buddha's websites. The defendant moved to dismiss the complaint for lack of personal jurisdiction, arguing that it lacked sufficient ties to New York and that the plaintiff had alleged no infringing activity within New York. The district court granted American Buddha's motion to dismiss.
Due to a split of authority on the jurisdictional issue, the 2d Circuit certified a question the following New York's highest court, its court of appeals: "In copyright infringement cases, is the situs of injury for purposes of determining long-arm jurisdiction under N.Y. C.P.L.R. § 302(a)(3)(ii) the location of the infringing action or the residence or location of the principal place of business of the copyright holder?" The New York Court of Appeals ultimately determined that in copyright infringement cases involving the uploading of a copyrighted printed literary work onto the internet, the injury caused by the infringement is suffered where the copyright owner is located—and not where the infringing material may have been uploaded from (see IP Update, Vol. 14, No. 4).
Based upon that New York Court of Appeals ruling, the 2d Circuit has now determined that the situs of the plaintiff's alleged injury was New York, where the plaintiff resides. Accordingly, the 2d Circuit vacated the district court's judgment for defendant and remanded the case for the district court to consider whether Penguin Group has established the four remaining jurisdictional requirements and the extent to which the exercise of jurisdiction over the defendant would be consistent with the requirements of due process.
Copyright / Prejudgment Interest
Prejudgment Interest in Copyright Infringement Suit Tracks to
Date of First Infringement
By Whitney D. Brown
The U.S. Court of Appeals for the Third Circuit affirmed a nearly $20 million verdict in favor of a plaintiff-appellee, finding that an additional award of prejudgment interest should be applied from the date when a fraud that resulted in a copyright infringement began, not when the plaintiff discovered the infringement. William A. Graham Co. v. Haughey et al., Case No. 10-2762 (3d Cir., May 16, 2011) (Smith, J.).
In 1991, Thomas P. Haughey left his position with The Graham Company, an insurance brokerage, to join USI MidAtlantic Inc., one of Graham's competitors. When Haughey left Graham, he took two binders containing hundreds of pages of text describing various types of insurance coverages, exclusions, conditions and similar matter. The materials had been prepared by Graham employees and were protected by Graham's copyrights. From July 1992 until 2005, Haughey and employees at his new employer used the materials to prepare insurance coverage proposals for presentations to clients.
Graham did not discover the unauthorized use of its binder materials until November 2004. In February 2005, plaintiff Graham filed a copyright infringement suit against Haughey and USI MidAtlantic. The defendants argued that the Copyright Act's three-year statute of limitations barred the plaintiff's claims, but the district court rejected their argument. The district court determined that the "discovery rule," which tolls the limitations period until the plaintiff learns of the cause of action or with reasonable diligence could have done so, applied to the Copyright Act. At trial, the plaintiff did not seek statutory damages, but instead sought actual damages in the form of the defendants' profits attributable to the infringement. The plaintiff argued that defendant USI MidAtlantic had earned $32 million in profits that was directly attributable to the infringement, with defendant Haughey personally earning $3 million from the infringement due to commissions. The burden then shifted back to the defendants to prove that their revenues were attributable to factors other than the copyrighted work. The jury found for the plaintiff, awarding more than $16.5 million against defendant USI MidAtlantic and nearly $2.3 million from defendant Haughey, representing about 70 percent of USI's profits and 75 percent of Haughey's profits. Subsequently the court set aside the jury's verdict, determining that Plaintiff had in fact been placed on notice of Defendants' conduct as early as fall of 1991. A second trial, limited to damages, resulted in a second jury verdict awarding $1.4 million in damages against defendant USI and $268,000 against defendant Haughey.
The parties appealed to the 3d Circuit (Graham I). The plaintiff argued that the district court's holding regarding notice was mistaken, while the defendants argued that the plaintiff had failed to prove a causal nexus between the defendants' alleged infringement and profits. The 3d Circuit ruled in Graham I that the plaintiff had effectively shown causation and that the district court had erred in finding that the plaintiff could have reasonably discovered the infringement before February 2002. The 3d Circuit remanded the case to the district court for a determination of whether the defendants were correct in their argument that 70 percent and 75 percent apportionments of the defendants' profits was "excessive." On remand, the district court rejected the "excessiveness" argument and reinstated the original jury verdict.
In their second appeal to the 3d Circuit (Graham II), the defendants argued that the nearly $20 million jury verdict "shocks" the judicial conscience and was improper. The defendants further argued that the award of prejudgment interest dating from when the fraud allegedly began was improper, maintaining that such interest should only be applied from 2004, the date when the plaintiff allegedly discovered the infringement. The defendants also argued that the district court's tolling of the limitations period because of the "discovery rule" and USI MidAtlantic's alleged concealment of the infringement should also toll the interest period.
The 3d Circuit disagreed, upholding the jury verdict and finding that use of the discovery rule to change the date of accrual and delay the onset of prejudgment interest would "warp its fundamentally plaintiff-friendly purpose" and would "give defendants additional incentive to conceal their tortious or otherwise illegal acts," given that "a fraudster would owe no interest on his purloined cash until discovery of the theft, and would thus be allowed to benefit from an interest-free loan." The 3d Circuit also rejected USI's arguments that its profits could be attributed to the expertise and hard work of its brokers, more than its use of the plaintiff's copyrighted materials, noting that while it had some sympathy for USI MidAtlantic, "such sympathy is not, however, sufficient to justify overturning the jury's verdict."
Practice Note: If a plaintiff overcomes the tolling of the statute of limitations based on the "discovery rule," that rule has no effect on the date upon which prejudgment interest begins to accrue. Prejudgment interest will accrue beginning on the date the infringement occurred, not the date when the plaintiff discovered the infringement.
Unfair Competition / California § 17200
Standing Under California § 17200 Only Requires Injury
From Business Practice
By William Diaz and Daniel Powers
Drawing upon recent California Supreme Court rulings, the U.S. Court of Appeals for the Federal Circuit reversed a California federal district court's dismissal of claims under the state's unfair competition law, finding the court had wrongly dismissed the claims for lack of standing. Allergan, Inc. et. al. v. Athena Cosmetics, Inc. et. al., Case No. 10-1394 (Fed. Cir., May 24, 2011) (Gajarsa, J.).
Allergan, a manufacturer of an FDA-approved treatment for inadequate eyelash growth, Latisse®, brought suit alleging the defendants had infringed or induced infringement of multiple patents. Allergan also claimed defendants violated California's unfair competition law, U.C.L. §§17200 et seq. With respect to the latter claim, Allergan contended that defendants' manufacture, sale or marketing of hair/eyelash growth products that had not been approved by the FDA or state health regulators constituted unfair competition under the California statute.
The defendants countered that Allergan lacked standing because the statute only protects persons who have suffered a loss that is eligible for restitution. Restitution is a remedy that seeks to restore the status quo; it requires the plaintiff to have had an ownership interest in the money or property it seeks to recover. The district court found Allergan had no such interest in lost profits or market share because defendants' profits derived from third-party consumers. Allergan appealed; its patent claims were stayed pending appeal of the unfair competition claim.
The Federal Circuit rejected the district court's narrow view of the California unfair competition statute. While acknowledging that California voters had approved Proposition 64 to restrict standing requirements and address abuses that had resulted in frivolous lawsuits, the Court noted that the California Supreme Court's decisions in two cases that were decided while the Allergan appeal was pending (Kwikset Corp. v. Superior Court of Orange County and Clayworth v. Pfizer, Inc.,), demonstrated that Proposition 64 did not limit standing solely to injuries compensable by restitution. Instead, a plaintiff need only allege an injury in fact that was the result of the unfair business practice. Applying this reasoning, the Court held that Allergan had adequately pleaded a claim under U.C.L. §17200.
Importantly, the Court also rejected the defendants' claims that standing under U.C.L. §17200 required a plaintiff to have direct business dealings with a defendant. The Court denied that Proposition 64 added any such "business dealings" requirement to U.C.L. §17200 claims.
Practice Note: The Allergan decision demonstrates that while standing to file suit under §17200 is more limited than it was in the past, §17200 remains a potent tool that litigants can use to challenge a competitor's practices.
Trade Secrets / Disclosure
Combining Disclosed Technology Can Be a Protectable Trade
Secret
By Adam A. Auchter
The U.S. Court of Appeals for the Fifth Circuit has held that, under Texas law, unique combinations of previously disclosed elements can constitute a trade secret. Tewari De-Ox Sys., Inc. v. Mountain States/Rosen, L.L.C., Case No. 10-50137 (5th Cir., Apr. 5, 2011) (Prado, J.).
Plaintiff Tewari developed a "zero oxygen" meat-packing method and disclosed the technology involved in multiple 2004 patent applications. In 2005, defendant Mountain States/Rosen (MTSR) signed a non-disclosure agreement with Tewari in efforts to determine if the plaintiff's method could increase the shelf-life of MTSR's case-ready cuts of lamb. Tewari claimed that it revealed trade secrets to MTSR during the demonstration of his method and that MTSR later misappropriated those trade secrets.
The district court initially rejected the defendant's argument that the prior disclosure in the 2004 patent application destroyed the secret, on the ground that a patent application does not disclose a trade secret. However, on a motion for reconsideration, the court ruled that any information disclosed in the 2004 patent applications were no longer trade secrets when the NDA was signed in March 2005, relying on Group One v. Hallmark, and granted summary judgment to MTSR. The district court determined that the difference between what was disclosed in the 2004 patent applications and the 2005 meeting with the defendant was "merely a customization" based on MTSR's needs and using MTAR's equipment, and therefore Tewari had no trade secret to protect.
The 5th Circuit, sitting de novo, agreed with the district court that any information disclosed in the 2004 patent applications were no longer trade secrets. However, the court determined that the district court incorrectly ruled that Tewari's unique combinations of previously disclosed elements could not constitute trade secrets.
Although no post-2000 Texas case directly addresses whether a published patent application destroys the secrecy of its contents for trade secret purposes, the 5th Circuit relied on the weight of authority from the other jurisdictions. A published patent application is not "secret." The plaintiff's 2004 applications were published a year prior to the meeting with MTSR, and any contents disclosed would no longer qualify as trade secrets.
Tewari, in an affidavit, defined multiple trade secrets that it argued were not disclosed in the 2004 applications. They involved combinations of the disclosed information as well as new adaptations. The 5th Circuit, relying on its opinion in Water Services, explained that a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design or operation of which in unique combination, affords a competitive advantage and is a protectable secret. Even though the district court rejected Tewari's alleged trade secrets as "customization" or "trial-and-error" processes, the 5th Circuit cited to Ventura Manufacturing, which specifically granted trade-secret protections to a trial-and-error process. As such, Tewari created a fact dispute as to whether it had trade secrets that it disclosed to the defendant.
Because the district court incorrectly defined Tewari's trade secrets and failed to consider that a unique combination of previously disclosed elements constituted protectable trade secrets, the 5th Circuit reversed the summary judgment on the plaintiff's trade secret misappropriation and breach of fiduciary duty claims and remanded the case.
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