IP Law Alert

Second Circuit Holds That Shipping a Single Counterfeit Item to New York May Support Personal Jurisdiction When Combined with Other Business Activity in New York

Owen J. McKeon — Fri, 20 Aug 2010 13:04:05 -0500

On August 5, 2010, the Second Circuit issued an important decision affecting a brand owner’s ability to establish personal jurisdiction against out-of-state defendants involved in the online sale of counterfeit goods. In Chloe v. Queen Bee of Beverly Hills, LLC, the Second Circuit vacated a Southern District of New York (“SDNY”) decision dismissing an anti-counterfeiting case for lack of personal jurisdiction. See Chloe v. Queen Bee of Beverly Hills, LLC, 571 F. Supp. 2d 518 (S.D.N.Y. 2008) (hereafter “District Court op.”), vacated and remanded, 2010 U.S. App. LEXIS 16192 (2d Cir. 2010) (hereafter “Second Circuit op.”).

In Queen Bee, Chloe sued several defendants including Queen Bee of Beverly Hills, LLC and its partners Rebecca Rushing and Simone Ubaldelli for trademark infringement and counterfeiting arising out of the defendants’ sales of counterfeit Chloe® handbags. District Court Op. at 521. Individual defendant Ubaldelli moved to dismiss for lack of personal jurisdiction, arguing that one sale to an employee of the plaintiff’s attorneys’ law firm—a so-called “manufactured contact”—was insufficient to confer personal jurisdiction on him See id. at 524. The district court dismissed the claims against Ubaldelli, reasoning that, among other grounds, “it would violate due process to permit a plaintiff to manufacture personal jurisdiction by purchasing an allegedly infringing product in a plaintiff’s forum of choice.” Id. at 526 & 530. In its decision, the district court acknowledged the existence of conflicting precedent within the SDNY on that jurisdictional issue. While some SDNY decisions have held that personal jurisdiction in a trademark infringement case can not derive solely from Internet sales “manufactured” by the plaintiff or its representatives, see District Court Op. at 524-525; citing Mattel v. Anderson, No. 04 Civ. 5275, 2005 U.S. Dist. LEXIS 14404 (S.D.N.Y. July 18, 2005), others have found personal jurisdiction based solely on the solicitation of Internet sales and a shipment into New York initiated by a plaintiff representative. See District Court Op. at 524-525, citing Mattel v. Procount Bus. Svcs., No. 03 Civ. 7234, 2004 U.S. Dist. LEXIS 3895 (S.D.N.Y. Mar. 10, 2004); Mattel v. Adventure Apparel, No. 00 Civ. 4085, 2001 U.S. Dist. LEXIS 3179 (S.D.N.Y. Mar. 22, 2001).

In an important win for brand owners, the Second Circuit vacated the district court’s decision and held that “Ubaldelli’s single act of shipping an item into New York combined with the substantial business activity of Queen Bee, the entity with which Ubaldelli was affiliated, involving New York, g[a]ve rise to personal jurisdiction over Ubaldelli.” Second Circuit Op. at *3. The Second Circuit found that both New York’s long arm statute and the Due Process Clause of the Constitution were satisfied. The court noted that defendants’ repeated sales of non-Chloe® designer merchandise to New York consumers showed that “the shipment of a counterfeit Chloe Bag was not . . . a ‘one-off transaction’ . . . but rather a part of a larger business plan purposefully directed at New York consumers.” Id. at *20. It also found that N.Y. C.P.L.R. Section 302(a)(1) was satisfied by Ubaldelli’s shipment of a counterfeit bag into the state and Queen Bee’s highly interactive website, which offered those bags for sale to New York consumers. See id. at *28. In addition, the court held that jurisdiction over Ubaldelli comported with due process requirements because “Queen Bee [] developed and served a market for its products” in New York, and Ubaldelli’s “generalized complaints of inconvenience” arising from having to defend himself in New York did not render the assertion of jurisdiction unreasonable. Id. at *31 & * 37. The Court left unanswered, however, whether a single shipment to an agent of the plaintiff may “by itself, constitute[] an act of trademark infringement.” Id. at *14-*16 n.3.

The import of the jurisdictional issues at play in Queen Bee were further emphasized by attention the case received from the International Trademark Association. INTA filed an amicus brief in support of Chloe’s position, arguing that the Second Circuit should reverse the district court and find jurisdiction.

Owen J. McKeon is a Director in the Gibbons Intellectual Property Department. Wendy R. Stein, an Associate in the Gibbons Intellectual Property Department, assisted in the preparation of this post.

Library of Congress Says You Can Jailbreak Your Smartphone

Lisa H. Wang — Tue, 03 Aug 2010 11:22:50 -0500

On July 26, 2010, the Library of Congress ruled that “jailbreaking” of smartphones is a fair use under the Copyright Act. Under the Copyright Act, the Librarian of Congress is required to review classes of works every three years for exemptions to the ban against circumventing technological measures that control access to copyrighted materials. The purpose for the triennial review is to determine whether users of copyrighted works are adversely affected by the anti circumventing ban in their ability to make noninfringing uses of copyrighted work. As part of its decision making process, the Copyright Office provides notice of its rulemaking, solicits input from the public and makes a final recommendation to the Library of Congress.

This year, the Library of Congress granted exemptions to six of the 19 submitted classes of works. One of the interesting exemptions is the ability to “jailbreak” or circumvent the technological measures contained on smartphones and in particular Apple’s iPhone, to prevent unapproved software from being installed and run on such phones. In other words, it is now permissible as fair use to “jailbreak” Apple’s iPhone in order to make the operating system on that phone interoperable with a third-party’s software that has not been approved by Apple.

The relevant section regarding jailbreaking states as follows:

Computer programs that enable wireless telephone handsets to execute software applications, where circumvention is accomplished for the sole purpose of enabling interoperability of such applications, when they have been lawfully obtained, with computer programs on the telephone handset.

The exemption is applies only to instances, “where circumvention is accomplished for the sole purpose of enabling interoperability of such applications.” Thus, to be exempt, the user must prove that their jailbreaking activity is being performed to ensure interoperability of the phone’s copyrighted material with the unauthorized third-party material.

While the newly granted exemption may be welcomed news to some smartphone users, it should be noted that it is only effective for the ensuing 3-year period or until the next rulemaking. In addition, although the exemption does not make jailbreaking illegal, it also does not prevent smartphone manufacturers from seeking technological countermeasures to prevent jailbreaking.

Lisa H. Wang is an Associate in the Gibbons Intellectual Property Department.

Former Judge Paul Michel Discusses Proposed Changes to US Patent System

David E. De Lorenzi — Fri, 23 Jul 2010 10:43:20 -0500

A Message from the Chair, David E. De Lorenzi:

"Congress Needs to Act" is the first article published by Judge Paul R. Michel since his retirement from the Federal Circuit, where he served as the Chief Judge. Judge Michel's below speech was given on July 21, 2010, at the Global Intellectual Property Center of the U.S. Chamber of Commerce, providing commentary on the current state of the nation's patent system and how the system can be improved to bolster US economic growth.

Judge Michel will be a featured speaker on these same topics in October at the Gibbons Institute/NJIPLA Fall program in Newark, New Jersey. More details on the October program will be posted next month.

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"American economic security is threatened in a way Congress has failed to recognize. Our biggest challenge is stemming the outflow of jobs, talent, technology and manufacturing. All four losses drain away national economic power. All result from the same cause: chronic under-financing of our innovation infrastructure. Although invisible, it is our nation’s greatest asset. Strengthening it can assure our prosperity and restore our technological leadership. We urgently need to increase invention and make new products that Americans and others will need, want and buy. To increase innovation, however, we must increase investment.

And it is needed immediately because we are already losing our international lead in technology and our global competitiveness. In a recent study, the United States came in dead last of the 40 top technology countries in the world in strengthening its innovation infrastructure over the last decade. Foreign inventive activity has surged to the point where filings in the United States Patent and Trademark Office by foreign entities now equal filings by Americans. Filings in the Chinese patent office by Chinese companies show exponential advances in twelve out of twelve top technologies.

Public finance for increased investment in innovation, however, is not available. It has been exhausted by the cost of two, concurrent and continuing wars and a decade of fiscal mismanagement, saddling us with a huge annual debt payments and recent annual budget deficits of many hundreds of billions of dollars, and this year of $1.5 Trillion. In this recession when tax revenues are down, obtaining even a modest increase in public R&D funding will be difficult, if not impossible. Actually, the challenge will be to avoid cuts in government R&D funding. The Administration recently instructed all agencies except the Defense Department to plan for a 5% reduction. At best, agency budgets will be frozen. Anyway, private investment has always supported much R&D by research-based companies, universities, and other innovators. Only increased private finance, then, can fund the needed increase in research and development. But how do we incentivize increased private investment in innovation? The answer is simple: strengthen the intellectual property systems – patents, trademarks, trade secrets, copyright, but especially patents. What we most need is faster, sounder patent grants, plus swifter, stronger, subtler court enforcement. After all, no one can be expected to invest without confidence in a return. Patents, and the protection of investment they afford, provide the only incentives strong enough to cause a big enough increase in private investment in innovation.

A primary engine of American recovery and resurgence therefore will have to be an improved patent system. Without that, both short-term recovery and long-term prosperity will be stunted. By “system”, I mean primarily the Patent and Trademark Office and the Federal courts, which, along with the International Trade Commission, afford the only mechanisms to enforce patent rights.

Using patents to spur both economic and technological advances is hardly a new idea. They have been a primary engine of economic growth and technological progress since 1790 when the First Congress passed the first Patent Act. Unlike today’s Congress, the founders knew patents promote national prosperity, economic growth, and technological progress. Patents have promoted repeated surges of technological advance, the most recent in the information technology revolution of the 1990’s. Notice that this was the last time our country had a balanced budget. And now, bio-tech shows promise of another surge.

Note, too, that if we strengthen the patent system, the job creation needed if our country is to rehire the 15 million unemployed workers, half from the recent recession, and add 13 million new jobs by 2018 to absorb a growing labor force will naturally follow. So will migrations of the technologically talented. If more R&D is done here, they will come here and stay, at least if we fix our broken visa system. Otherwise, foreign talent studying at our research universities will all return home. Our own leading technologists will also go elsewhere, just as is now happening with U.S. companies such as Intel and Applied Materials. Both will soon open large research laboratories headed by their top American researchers, not in California but in China.

A few commentators, despite all evidence, still assume the nation could afford a large increase in public R&D funding. Others assume that even though public revenue is unavailable, the needed R&D can be funded by company revenues. But that is not realistic. Most innovative companies are new and small. Many do not yet make profitable products. Some do not yet sell any products. Yet the majority of new technologies and 75% of new jobs are now being created by small, young, companies. Therefore, the firms with the least revenue to support their R&D are those most needing and deserving private investment. Biotech start-ups are only one example. Without it, many of them will die. With it, medical science, public health and national wealth will surge. Besides, 2/3 of the economic growth and ¾ of the new jobs since WWII came from innovation, and technology-related jobs pay 2.5 time average salaries.

Well, what is wrong with the present patent system? First, and foremost: delay -- health and welfare-diminishing, wealth-reducing, job- destroying, technology-impeding delay. In some technologies it now takes, at least, 4-6 years even to get a patent. The product life-cycle is often shorter than that. For all technologies the average wait is three years. That is two times longer than in 1990. Too long! And it is going up. Even worse, because nearly all applications must by law be published at 18 months, foreign competitors can pirate inventions for years before the patents issue, for until then patent owners have no rights against infringements whether produced here or imported. No wonder foreign competitors minutely monitor the PTO website! The story is told that thousands of Chinese engineers sit at computers reading U.S. patent applications rather than doing research in labs.

Why such extensive delay? Because for two decades the patent office has been grossly underfunded. And it is still losing ground. It operates entirely on user fees paid by applicants and patent owners -- fees that were set by Congress six years ago -- at levels that do not support necessary operations. The PTO lacks sufficient numbers of examiners, especially experienced examiners, and modern computer systems. Imagine, the government’s own technology agency using decades-old computer technology! These are the principal reasons delays are so long.

The patent system is failing primarily because the patent office is failing. In a single, blunt word, the patent office has become dysfunctional. Applications have tripled, and the PTO simply cannot keep up. Over 735,000 applications sit unread in a warehouse in Alexandria, Virginia. Note that the warehoused applications equate to almost two years worth of filings. Although some 490,000 applications are being examined, their progress is far too slow. And every year another 460,000 more are filed. Of the 1.2 million applications currently awaiting final disposition, only about 350,000 complete the examination process each year. So the backlog, already intolerable, is actually growing by 110,000 applications per year. It is now four times the backlog of 1990.

There are too few examiners – mostly young engineers and scientists -- and too few with experience. Nearly one third of the examiner workforce has been at the PTO for less than 3 years. But it takes at least 3 years for new examiners to become both competent and efficient. Faulty decisions by inexperienced examiners, like delay itself, harm the system and therefore innovation; such examiners allow patent claims they should reject, blocking innovation, and reject ones they should allow, causing further unnecessary delays and costs for Board appeals. And the lack of quality assurance undermines the presumption of patent validity provided by law and also the credibility of patents in the eyes of the media, academia and the Congress.

The trial courts too are hobbled. Most lack sufficient numbers of judges to expeditiously enforce good patents and invalidate bad ones. Almost 100 judicial vacancies remain unfilled, the highest vacancy rate in the history of the country. Most of these have gone unfilled for many, many months, and some for years. That means the courts are normally 12% understaffed. And almost 100 additional district and circuit judgeships are desperately needed but have yet to be authorized by Congress despite repeated requests by the Judiciary for two decades. So, the courts struggle with almost 200 too few judges because of two decades of Congressional neglect, just like the Congressional neglect of the patent office.

The result of course is long litigation delays that diminish the value of patents and add uncertainty that impedes invention and economic growth. Most patent infringement cases now take 3-5 years to verdict, with each appeal adding at least another year. Like patent examinations, litigations are simply too slow both for the pace of technological advances and for domestic and global markets. Delay must be cut at least in half, and soon. Because of delays caused by chronic underfunding of the Judiciary, innovation incentives are shrinking just when the nation needs them to be growing.

The gears of our patent system seem seized up. Ironically, Congressional inaction is discouraging private action. Obviously we need to strengthen and speed up both examinations and litigations, but only public funds can jump start the process. How so? Although PTO operations should remain financed by user fees, it needs an emergency transfusion of public money to overcome its warehouse backlog of 735,000 and equip it to keep up with the annual influx of 460,000 new applications. It needs thousands of additional examiners and salary increases to retain experienced, quality examiners. Most of all, it needs new computer systems and new space to house the existing workforce, as well as new hires. At present, two thousand of the six thousand examiners work at home, as the PTO lacks sufficient workspace for one-third of its workforce. Thus, even if Congress finally raises the fees, which it should, resolving the current crisis still requires a large infusion of public money. That is because much of the fee revenue arrives only years after the patents issue as maintenance fees. But money is needed now. Deferral will have corrosive consequences that cannot be undone. Therefore, I suggest the following emergency steps:

First, a one-time capital investment in the PTO of one billion dollars. It could be spent over the next several fiscal years, but it should be authorized and appropriated promptly. That should be enough to replace the IT systems, which the Director correctly calls “moribund,” and secure work space for the examiners. It probably could also pay for new hires to beat down the backlog.

Second, the Congress must guarantee by law that the PTO can spend an amount equal to the user fees paid by patent applicants and holders. Between 1992 and 2010, Congress diverted $759 million in fees paid to the PTO by patent holders and applicants and directed them instead to other governmental activity. In this year alone, Congress will siphon off an estimated $230 million in PTO user-paid fees. Essentially, PTO users have unwittingly been paying an additional tax subsidizing governmental expenditures that have nothing to do with PTO functions. Permanently ending this Congressional practice, called “fee diversion”, is a necessary precondition to reviving the PTO. If Congress continues spending user fees for other purposes, raising fee levels will have little effect.

But there is a Catch-22. If public R&D funding is already “maxed out” and other public funding otherwise already committed, then how could Congress find a billion dollars for the PTO? Well, when Congress wishes, it freely spends many billions of dollars, such as the $700 billion it provided to Wall St. I suggest only $1 billion, once. Just $1 billion, spread over several years, but provided soon.

Is my suggestion realistic? Yes, if Congress were to follow proper priorities. This public investment is absolutely necessary to our country’s short-term and long-term prosperity.

Well, would such capital investment fix everything that is wrong with the patent office? Maybe not everything, but certainly all the big problems. And, without it, other reforms will surely not suffice. Although other remedial steps are also necessary, most have already been started, at least on a pilot basis, by the new Director, David Kappos. But without an immediate, large, one-time dose of public funding, even his very sound leadership initiatives cannot produce the needed results and do so fast enough. In fact, despite his initiatives, the examiner corps is still shrinking, losing 500 examiners in the last several years. A net loss is again predicted for this year. So just when the patent office needs more examiners, it has fewer.

In his recent testimony before a House Appropriations Subcommittee, Director Kappos admitted that it will take many years to achieve timely examinations even if in the next two fiscal years Congress allows him to hire 1,000 new examiners per year. But since each year 500 leave, the total gain would only be 1,000, not 2,000. A much larger increase in examiners is needed to eliminate the backlog of 735,000 warehoused applications and assure timely examination of 460,000 new applications. My estimate is 3,000 additional examiners are needed if the PTO is to examine all incoming applications within one year.

What else? First, let the PTO open satellite offices in places like Detroit, and Houston, and hire unemployed engineers, patent agents and patent attorneys who are already experienced IP professionals. They can be productive immediately, unlike new graduates who need years of training. But again, Congressional authorization is probably needed. Under current law, most employees must work at the PTO campus in Alexandria, Virginia, or at home with regular reporting in person if living over 50 miles away.

Second, pay examiners better. Congress also controls the pay structure for examiners. But the gap between the examiner pay schedule and the General Schedule for non-technical civil servants is shrinking. Industry, I am sure, would willingly pay higher fees to enable the PTO to pay more competitive salaries to retain skilled examiners. Congress should raise these fees and pay levels.

What about ending the delays in court? In addition to promptly filling nearly 100 vacancies and Congress adding the nearly 100 judgeships long requested, what else could be done?

First, more frequent use of expert special masters to do claim construction and magistrate judges to police discovery would help. Second, discovery should be narrowed. If discovery were limited largely to evidence that can actually be used at trial, much delay as well as excess cost could be avoided. Staging discovery by issue also looks promising. But both require closer judicial supervision which in turn requires more magistrate and district judges.

The bottom line is this: unless Congress invests more in the America patent system, private investors will not. We must encourage investors to boost their investments in order to surge American R&D. The PTO and the courts both need more money, more space and more adjudicators. Congress must “prime the pump”. Only then can private investment take over. This is the only practical way to increase innovation and restore our nation’s competitive advantage. This strategy could restore us as the technology leader of the world, increase private and public revenues and stock values, raise our standard of living and create millions of new, high-paying jobs. With so clear and compelling a strategy, Congress need not hesitate to act.

But because members don’t understand that patents increase prosperity, they must first hear from you, from private sector leaders in law, business, media, and academia. The question is: Will you advocate these reforms to Congress?"

David E. De Lorenzi is Chair of the Gibbons Intellectual Property Department.

Recent Developments in False Marking Litigation

Thomas R. DeSimone — Tue, 20 Jul 2010 09:05:49 -0500

When the United States Court of Appeals for the Federal Circuit decided Bon Tool, it unwittingly triggered an avalanche of litigation against major corporations brought under 35 U.S.C. § 292, the false marking statute. The opinion resolved a split of authority regarding whether a manufacturer of a product could be subjected to a fine based on each article that had been falsely marked, or each decision to mark the article. Combined with the fact that the qui tam nature of the false marking statute obviated the need to establish traditional Article III standing, a new breed of patent trolls sprung into existence seemingly overnight, dedicated to the task of tracking down mis-marked products, and seeking to share half of a maximum $500 per falsely marked item bounty. The economic appeal in bringing such suits is obvious. A major manufacturer could potentially produce millions of falsely marked articles. Even if a court decided not to assess the full $500 penalty (which it has discretion to do), a successful plaintiff could still stand to reap a sizeable award based on the sheer number of falsely marked articles injected into the stream of commerce. Since that time, several cases have been decided that have helped to provide guidance to litigants on both sides of this rapidly evolving area of law.

Pequignot v. Solo Cup Revisited

On June 10, 2010, the Federal Circuit decided Pequignot v. Solo Cup Company, largely affirming the holding of Judge Leonie Brinkema of the United States District Court for the Eastern District of Virginia. Defendant Solo Cup had prevailed at the district court when Judge Brinkema held that Pequignot failed to establish that Solo Cup had acted with deceptive intent with respect to its falsely marked products. The decision clarified several key points.

First, the Federal Circuit confirmed that an article that was covered by an expired patent is the same as an unpatented article. This determination is important, because it satisfies the first prong of the false marking statute, which requires the marking of an unpatented article by the defendant.

Second, the court addressed burden shifting with respect to establishing deceptive intent to deceive the public, which is the second prong of the false marking statute. The court noted that “the combination of a false statement and knowledge that the statement was false creates a rebuttable presumption of intent to deceive the public, rather than irrebuttably proving such intent.” According to the court, not only may defendants rebut this presumption, but “the bar for proving deceptive intent here is particularly high, given that the false marking statute is a criminal one . . .” The court held that the standard of proof of intent for false marking is a “preponderance of the evidence.” Interestingly, the court also held that in regard to false marking related to expired patents, the “presumption of intent is weaker.” A defendant may not defeat an inference of an intent to deceive with “blind assertions of good faith.” The court confirmed that Solo had successfully rebutted the presumption when it provided evidence that it had relied on advice of counsel, and had carried out a plan to replace molds with unmarked ones as they wore out over time. When Pequignot was unable to raise a genuine issue of material fact showing otherwise, the case was decided in Solo’s favor.

Last, some practitioners had hoped that the Federal Circuit would use the Pequignot decision to revisit the “per article” standard of fines determined in the Bon Tool case. However, the Court threw cold water on such hopes, finding that because the other issues were case dispositive, a determination relating to the assessment of damages was rendered moot, vacating Judge Brinkema’s holding to the contrary at the district court level.

Developments Since Pequignot

Two recent cases have been decided in the district courts of Texas and Florida that address the level of specificity required by a plaintiff when pleading a false marking cause of action. In Patent Compliance Group, Inc. v. Interdesign, Inc., the defendant sought dismissal of the case based partly on a failure to state a claim upon which relief may be based and for failure to plead its false marking claim with requisite specificity under Fed. R. Civ. P. 9(b). In its complaint, plaintiff alleged that the defendant “intended to deceive the public by marking the Patent Expired Product with the ‘842 patent after its expiration.” In support of its allegation, plaintiff attached a copy of the patent, establishing the expiration date, as well as a picture of the actual product labeled with the expired patent number. The court held that this was a sufficient showing to survive the defendant’s motion to dismiss the complaint. Although the court declined to decide whether false marking claims were subject to the heightened fraud pleading standard of Rule 9(b), the court stated that, “[a]rmed with actual documentation that a product was falsely marked, a court may draw an inference of the defendants’ knowledge simply by the finite nature of patents and the ordeal an entity must go through to actively create and maintain a patent . . . Similarly, an actual photograph of a product recently injected into the stream of commerce with an expired patent number also creates an inference of a false statement.” The court cited to Pequignot, noting that defendant’s conclusory statements that it acted in good faith were insufficient to rebut the inference of deceptive intent.

In Advanced Cartridge Technologies, LLC v. Lexmark International Inc., the court took a more skeptical view of the plaintiff’s complaint. Although the Interdesign court specifically avoided the issue of whether Rule 9(b) is applicable to false marking cases, the United States District Court for the Middle District of Florida cited to the rule in holding that that the plaintiff’s complaint was factually deficient. Specifically, the court noted that, “Providing only sparse factual detail, the complaint utterly fails to state with particularity the circumstances constituting fraud.” The court dismissed the false marking claim, but provided the plaintiff leave to refile the complaint with the required degree of specificity.

A Legislative Fix on the Horizon?

In response to the unexpectedly high level of false marking litigation, legislators are scrambling to craft a fix. The Patent Reform Act of 2010 is currently under consideration by Congress (H.R. 4954). If passed, this legislation would eliminate qui tam suits by requiring plaintiffs to show competitive injury related to false marking. Damages would be assessed in a manner “adequate to compensate for the injury,” as opposed to the current statute, which allows a fine of up to $500 for each article. The legislation as drafted would apply to all pending cases. However, it is not clear when or if this legislation will ever be enacted.

Thomas R. DeSimone is an Associate in the Gibbons Intellectual Property Department.

Gibbons Institute Webinar Discusses the Supreme Court's Bilski Decision

Robert E. Rudnick — Thu, 08 Jul 2010 21:10:17 -0500

The Gibbons Institute of Law, Science & Technology hosted a webinar on July 1 to discuss the U.S. Supreme Court decision in Bilski v. Kappos that addressed the limitations on the patentability of business methods. More than 50 people listened to this webinar, which featured Erik Lillquist, Senior Associate Dean and Professor of Law, Seton Hall University School of Law; Robert E. Rudnick, Director, Intellectual Property, Gibbons P.C., and David W. Opderbeck, Associate Professor of Law and Director, Gibbons Institute of Law, Science & Technology, Seton Hall University School of Law.

The panelists reviewed, analyzed and discussed the implications of this decision with regard to patent protection in those industries employing business method and related software patents. Of particular interest to industry professionals and patent practitioners, Robert Rudnick provided a helpful list of best practices and tips for obtaining corresponding patent protection and enforcement in view of this important Supreme Court decision.

The webinar has been archived online and can be accessed by clicking here.

Robert E. Rudnick is a Director in the Gibbons Intellectual Property Department.

USPTO Recognizes That One Size Does Not Fit All

Andrew M. Grodin — Tue, 06 Jul 2010 11:37:50 -0500

The United States Patent and Trademark Office (USPTO), in an attempt to offer patent applicants more choices, recently proposed establishing a three-tiered examination system. Under the current system, with the exception of accelerated examination and those cases granted “special” status, all non-provisional patent applications go into the same queue for examination and are taken up in due course. Under the new proposal, an applicant would be able to choose either prioritized examination (Tier I), traditional examination (Tier II) or delayed examination (Tier III).

USPTO’s Goal is to Reduce Time to Issuance to One Year
Currently, a first office action occurs on average at 27.2 months and a patent takes, on average, 34.6 months to issue.

Tier I priority examination, is shooting for 4 months to first office action and 12 months to issuance. The goal of the proposed amendment is to provide applicants more flexibility in managing prosecution, reducing prosecution pendency, and enhancing efficiency, all without impacting the current workload or time to issuance of traditional (Tier II) applications.

Good Practices to Speed Up Any Examination
To achieve such a quick turn around, a priority application will be placed in a queue for all priority applications separate from Tier II cases, ensuring they will be taken up and considered in a more timely manner. Applications claiming priority from prior filed foreign applications will have to wait a bit and furnish some additional information before jumping onto the Tier I examination track. As explained in the Federal Register, to maximize the benefits of the priority examination, an applicant should be knowledgeable of the prior art, draft claims as broad as possible in view of the art and as narrow as one is willing to accept, respond within the shortened statutory periods, and be prepared to conduct examiner interviews.

Speed Comes With a Price
Anyone seeking to utilize Tier I or prioritized prosecution will be required to pay an additional fee to cover the priority request. The as yet-to-be-determined fee, will be used to hire and train the additional examiners needed to ensure that priority examination can be completed within the projected time frames. Additionally, to facilitate the processing of Tier I applications, the USPTO is considering limiting the number of claims in a Tier I application to 4 independent claims and 30 total claims.

Tier III examination on the other hand will allow an applicant to defer docketing of an application for review for up to 30 months after filing. By choosing to delay examination, an applicant can explore the market and focus on commercialization. If at any time during that 30 month period, the applicant deems the invention worth pursuing, they can request examination (and pay the fee) anytime prior to the expiration of the period. Failure to request examination will result in abandonment. The realization that one size does not fit all is a refreshing and welcome attempt by the USPTO to speedup the examination process and offer an applicant more choices.

Andrew M. Grodin is an Associate in the Gibbons Intellectual Property Department.

Supreme Court's Bilski Decision Rejects Federal Circuit's Machine-Or-Transformation Test For Business Method Patents

Robert E. Rudnick — Tue, 29 Jun 2010 09:22:53 -0500

On June 28, 2010, the Supreme Court handed down a highly anticipated decision affirming the Federal Circuit in Bilski v. Kappos. At issue in Bilski was the patentability of a claimed business method or process for hedging against the risk of price changes in an energy market. The Court unanimously affirmed the Federal Circuit’s decision to reject Bilski’s process claims as being unpatentable, but split in its opinion as to the grounds for rejecting the claims.

The majority opinion of the Court was delivered by Justice Kennedy, joined in full by Chief Justice Roberts, Justices Thomas and Alito, and joined in part by Justice Scalia. The Court held that the “machine-or-transformation” test applied by the Federal Circuit to reject Bilski’s business method claims is not the sole test to be considered in determining whether a claimed process is a “patent-eligible” process. In particular the Court stated that the test may be insufficient for determining the patentability of inventions concerning emerging technologies including, for example, software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression and the manipulation of digital signals.

The Court rejected the outright exclusion of process claims directed to so-called “business methods,” finding that the scope of such an exclusion was unclear and that Congress’ “prior use” defense to the infringement of business method claims as expressed in 35 U.S.C. §§ 273 (a)(3), (b)(1) would be meaningless if such claims were fully excluded from consideration as patent-eligible inventions.

The Court found its basis for rejecting Bilski’s process claims on the grounds that these claims represented an attempt to patent “abstract ideas.” Making reference to its prior opinions in the Benson, Flook and Diehr cases, the Court found that Bilski’s claims “[explained] the basic concept of hedging,” and that this concept represented “an unpatentable abstract idea, just like the algorithms at issue in Benson and Flook.” The Court reasoned that the patent eligibility of these claims would impermissibly “pre-empt used of [hedging] in all fields, and would effectively grant a monopoly over an abstract idea.”

Justice Stevens, writing for himself and joined by Justices Ginsberg, Breyer and Sotomayor, concurred in the judgment of the Court but found that it was unclear how the grounds for rejecting Bilski’s claims as an abstract idea found sufficient support from the Court’s case law. Justice Stevens suggested that because, business methods have historically fallen outside of the subject matter that the Court has considered as patent-eligible, a “wiser” holding would find that Bilski’s claims were patent-ineligible as describing “only a general method of engaging in business transactions.” Justice Breyer, writing for himself and joined in part by Justice Scalia, concurred in the judgment of the Court to emphasize several aspects of the decision receiving full endorsement by the Court.

In Bilski, the Court continues a trend beginning with the KSR and eBay decisions for overturning “bright line” rules set forth by the Federal Circuit on patent questions. The Court asserts that, while disapproving an “exclusive” machine-or-transformation test for determining patent-eligible processes, it has not foreclosed the Federal Circuit’s ability to develop other “limiting criteria.” Nevertheless, it is likely that the Federal Circuit will proceed to craft such criteria henceforth with great caution, and with ample reference to the Court’s prior opinions. It remains to be seen how the United States Patent & Trademark Office will contribute to this process. In the interim, patent applicants would be wise to continue to draft business method claims that satisfy the machine-or-transformation test, and that clearly delimit the claimed method when performed by a machine in a manner defined by the operation of the machine.

The Gibbons Institute of Law, Science & Technology at Seton Hall Law School will present a free webinar - Understanding the Supreme Court's Bilski Decision - on Thursday, July 1, at 9:00 am. For more information or to attend this program, please visit the Gibbons website.

Robert E. Rudnick is a Director in the Gibbons Intellectual Property Department. Thomas J. Bean, Counsel to the Gibbons Intellectual Property Department, assisted in the preparation of this post.

12-Month Extension to the Provisional Patent Application Period - Buying More Time to Commercialize Your Invention

Robert E. Rudnick — Thu, 22 Apr 2010 12:55:44 -0500

On April 2, 2010, the USPTO issued a press release and published in the Federal Register a request for comment on a proposed change that would effectively give applicants a 12-month extension to the current provisional application period. Under the current rules, an applicant must file a nonprovisional application within 12-months after the filing of a provisional application pursuant to 35 U.S.C. § 119(e) and must thereafter complete any missing parts to that application within a time period of up to a maximum of seven months.

The latest proposed revision to the missing part practice would now give applicants an additional 12-month period under which to complete this application. Even with the new proposed revision, a nonprovisional application must still be filed within the first 12-month period following the filing of a provisional application and have a properly executed oath or declaration along with at least one claim. Applicants, however, will now be given up to a year rather than seven months to complete the nonprovisional application by payment of the required search fee and a nominal late payment surcharge. It should be noted that this change would not affect foreign filings, which must still be filed within 12 months after the filing date of a provisional application in accordance with the Paris Convention for the Protection of Industrial Property. Also, by exploiting the delayed payment, an applicant foregoes his right to opt not to have the patent application published at 18 months from the provisional patent application filing date.

The USPTO believes that by providing this additional time, applicants may now “ascertain the value of their inventions, thereby helping applicants decide whether to incur the additional costs associated with pursuing patent rights.” While initially expending only a relatively low cost to file the application, the applicant may now take the additional 12-month period to focus their time and efforts on commercialization. Additionally, the USPTO explained that, under the current statutory scheme, applicants routinely file several nonprovisional applications, which are dependant on various provisional applications. By providing an additional 12-month period, the USPTO believes that this will “help applicants focus on their most important applications and conserve USPTO resources.”

While the argument for cost savings is noted, overall this change may be more beneficial to only a relatively small number of pro se applicants who prepare and file applications on their own behalf without the assistance of skilled patent attorneys or agents. For those pro se applicants, this additional time would seem to allow them the opportunity to attempt to commercialize their potential patent while avoiding their only out of pocket expense of having to pay a large portion of the filing fees and ultimately, if and when a patent were to issue, the maintenance fees.

For all other applicants, including nearly all businesses and most individuals, relying on patent attorneys or agents for preparing patent applications, the cost of careful preparation of a patent application by the patent attorney or agent is the majority of where the out of pocket costs are spent rather than in the filing fees. Most business entities advantageously rely on in-house attorneys and/or retained outside patent counsel to draft the patent application for obtaining broad patent protection. As a consequence, it would be rare that such an applicant under the present rules would be willing to pay extension fees for merely delaying payment of the search fee.

Further, the USPTO notes that with regard to this proposed change, the non-provisional patent application need only include a single claim. However, the cost of preparing additional claims is incremental to the cost of preparing the patent application specification and single claim. Furthermore, it will be questionable whether this additional time will even be used to its fullest extent since the revision is adding just under half a year to the process in light of the current time to respond to a missing parts notice of up to seven months. Comments are to be submitted to the USPTO on or before June 1, 2010. Stay tuned - we will keep you updated.

Robert E. Rudnick is a Director in the Gibbons Intellectual Property Department. Carrie A. Longstaff, an Associate in the Gibbons Intellectual Property Department, assisted in the preparation of this post.

Hot News Misappropriation Injunction Issued Against TheFlyOnTheWall.com

Gibbons P.C. — Thu, 01 Apr 2010 14:51:05 -0500

In Barclays Capital Inc. v. TheFlyOnTheWall.com, 06 Civ. 4908 (S.D.N.Y. March 18, 2010), Judge Denise Cote issued a narrowly tailored injunction against republication of financial services firms stock recommendations.

FlyOnTheWall.com (Fly) collected and published summaries of stock analyst reports within minutes after they were released by financial institutions to their clients. FlyOnTheWall sometimes included summaries of the research reports, but following commencement of the suit it only published headlines such as "EQIX: Equinox initiated with a Buy at BofA/Merrill." Three financial institutions filed suit against Fly for hot news misappropriation and copyright infringement.

After denying the parties' cross motions for summary judgment, Judge Cote held a bench trial. She made extensive findings regarding the business models of the financial institutions, including how each one devotes substantial efforts to developing original research and provides its research to clients at no charge in the hope the client will place trades with the firm based on the recommendations. She described how each institution conducts a morning call at roughly 7:15 am, and the substantial efforts by the institutions to reach their clients beginning at 8 am and continuing to mid-day and sometimes over two days. She also made findings about the firms' efforts to restrict access to the research, to control press coverage for 4 hours or until 2 pm, and their surveillance programs. The court also credited evidence that the unauthorized redistribution of recommendations was a major contributor to the decline in the resources each firm devotes to equity research.

With regard to copyright, Judge Cote was persuaded by seventeen examples of verbatim copying from the research reports. Plaintiffs elected the minimum statutory damages award, so the court entered judgment in the amount of $6,750 for Barclays and $6,000 for Morgan Stanley, plus prejudgment interest from the date of publication to entry of judgment. The court also awarded attorney's fees for the copyright portion of the case, which could be reduced following a hearing on Fly's financial condition.

With regard to hot news misappropriation, Judge Cote reviewed the development of case law regarding hot news, with emphasis on Supreme Court and Second Circuit decisions. She then found that the plaintiff's satisfied the five element test set forth by the Second Circuit in National Basketball Association v. Motorola Inc., 105 F.3d 841 (2d Cir. 1997):

The cost of generating information was undisputed.
On timeliness, the court found the recommendations were clearly time sensitive, and noted the Second Circuit's holding in FII that the tort encompasses only those situations where the defendant published time sensitive information "before [the plaintiff] has been able to utilize his competitive edge."
As for free-riding, the court found the accused acts were Fly's "core business" and discounted publication of the news by others.
Regarding competition, the court noted that the firms and Fly were in direct competition regarding disseminating recommendations to investors for their use in making investment decisions, and that Fly's use was undertaken "with the obvious intent, if not the effect, of fulfilling the demand for the original work." In particular, she noted that some investors will place trades based solely on the buy, sell or hold recommendation, without reading an entire research report. Judge Cote also noted that the firms and Fly used similar and sometimes identical channels of distribution and that Fly took steps to compete even more directly by aligning itself with discount brokerages.
Lastly, the court found that Fly's conduct would be likely to substantially threaten the firms' ability to continue to participate in the market for monetizing their research.

The court next discussed the scope and temporal length of injunctive relief, noting that under International News Service v. Associated Press, 248 U.S. 215 (1918) the lead time for exploitation of the news was the period "until its commercial value as news to the complainant and all of its members had passed away." Judge Cote declined the firms' request for four hours or until 12:00 noon, whichever is later, instead issuing a more limited injunction as follows:

For recommendations released prior to the market opening, Fly was enjoined for 1.5 hours or until 10:00 a.m., whichever is later.
For recommendations released while the market is open, the injunction is for two hours after the release.

In addition to the temporal limitations, there are two additional provisions of interest: First, the court provided an exception for factual analysis by Fly of market movements that refers on occasion after the market opens to a firm's recommendation in the context of independent analytical reporting on a significant market movement that has already occurred that same day. Second, Judge Cote scheduled a one year reevaluation of the scope of the injunction for Fly to seek relief in the event the firms have not taken reasonable steps to restrain the systematic, unauthorized misappropriation of the recommendations by third parties.

Reed Elsevier v. Muchnick: Copyright Registration is Not a Jurisdictional Requirement

Gibbons P.C. — Wed, 10 Mar 2010 09:16:02 -0500

Last week, the Supreme Court issued its highly-anticipated decision in Reed Elsevier v. Muchnick. The decision arose out of a class action settlement between publishers and authors following the Supreme Court’s holding affirming copyright infringement in New York Times, Co. v. Tasini. The Southern District of New York certified the settlement, but the Second Circuit reversed, holding that pursuant to §411(a) of the Copyright Act, the Court lacked subject-matter jurisdiction to approve the settlement because the settlement covered both registered and unregistered works. The Supreme Court reversed, holding that the registration requirement of §411(a) was a claim processing rule and not a jurisdictional requirement. It left open, however, the question of how strictly §411(a) should be applied.

The Second Circuit Decision

During proceedings before the Second Circuit in Reed Elsevier, the court sua sponte asked the parties to brief the issue of whether §411(a) was a jurisdictional requirement. In response, all parties filed briefs asserting that the district court had subject-matter jurisdiction to approve the settlement. The Second Circuit ruled that the district court lacked the subject-matter jurisdiction necessary to certify the settlement because some of the works at issue were unregistered. Certiorari was granted to resolve the question of whether §411(a) restricts the subject-matter jurisdiction of federal courts. Because no party’s brief supported the Second Circuit’s holding that the court lacked subject-matter jurisdiction, the Supreme Court assigned an amicus to draft the brief in support of the Second Circuit’s holding.

The Supreme Court Distinguishes Claim Processing Rules from Jurisdictional Requirements

At the outset, the Supreme Court noted that jurisdictional rules are generally “prescriptions delineating the classes of cases (subject-matter jurisdiction) and the persons (personal jurisdiction) implicating that authority.” The Court recognized the difficulty of distinguishing “jurisdictional” conditions from claim-processing rules, and cited to its 2006 holding in Arbaugh v. Y & H that a statutory requirement is a jurisdictional requirement only if Congress identifies it as such. Because the registration requirement of §411(a) is not identified as a jurisdictional requirement, it is not, and instead works as a claim-processing rule. The Court continued by noting that the registration requirement in §411(a) has qualities of a claim processing rule:

it imposes a precondition to filing a claim that is not clearly labeled jurisdictional,
it is not located in a jurisdiction-granting statutory provision, and
it admits several congressionally authorized exceptions.

Unanswered Questions

The Supreme Court decision confirmed that courts can adjudicate disputes involving unregistered works. Even so, the Court declined to address the question of whether the registration requirement of §411(a) is satisfied by filing an application, or whether the Copyright Office must either grant or reject the application before a claim for infringement may be brought.

Circuit courts are divided on this issue. For example, the Fifth Circuit held in Positive Black Talk v. Cash Money Records that simply filing an application is adequate, as long as all required elements are deposited with the Copyright Office. This view has been called the “Application Approach.” Conversely, the Tenth Circuit in La Resolana Architects, PA v. Clay Realtors Angel Fire held that simply filing all the required elements of an application is not enough to satisfy §411(a), and that either a rejection or an acceptance must be received by applicant in order for a party to bring an infringement claim. This has been called the “Registration Approach.”

While the Second Circuit has yet to address the issue, three recent district court cases in the Southern District of New York have applied the Registration Approach. In Do Denim v. Fried Denim, Judge Swain granted defendant’s motion to dismiss the copyright infringement claim for lack of subject matter jurisdiction under §411. Do Denim had filed its deposit, application, and fee with the Copyright Office prior to filing suit, but it had yet to receive either a grant or refusal. Two other Southern District decisions have followed Do Denim in support of dismissal of the claim of infringement of an unregistered copyright: DMBJ Productions v. TMZ TV, and Lewinson v. Henry Holt and Company, LLC.

Inconsistent application of §411(a) has been a concern of copyright litigators for some time, and other blogs have addressed the split between circuits. In fact, the ABA Section of Intellectual Property Law recently wrote to the Senate suggesting legislation adopting the Application Approach.

While Muchnick abrogates cases describing §411(a) as “jurisdictional,” calling the section a claim-processing rule does not provide instruction on how strictly courts should apply the rule. As such, filing an infringement suit based solely on a pending application may risk dismissal in courts inclined to apply the Registration Approach. Even in a jurisdiction that adopted the Application Approach, obtaining a registration first may be advantageous, particularly in a preliminary injunction case where the presumptions flowing from registration may be important.

Thunderstorms on the Horizon for Cloud Computing

Luis J. Diaz — Mon, 08 Mar 2010 11:55:34 -0500

With the U.S. economy still reeling from the aftershock of what is now known as the “Great Recession,” companies large and small are evaluating cloud computing as a means of reducing IT costs. The National Institute of Standards and Technologies (“NIST”) and the Cloud Security Alliance have defined cloud computing as a model for on-demand network access to a shared pool of computing resources over the internet, namely software applications, data servers, networks and other services. Just as businesses and consumers now pay for gas, electricity and other utilities, cloud enthusiasts predict that the cloud will be sold on demand as a pure IT service.

The Silver Lining

Industry groups like ISACA recognize the silver lining in the cloud. For example, there are potential cost savings in the economies of scale that are achievable in a shared computing environment. The cloud also allows companies to scale without any major software or hardware investment. Thus, cloud users are able to deploy new services more rapidly than they could in a traditional IT model. Cloud computing also can accommodate changing business requirements in a flexible and scalable format. By relocating IT services to the cloud, moreover, companies are freed to focus on their core businesses, improve processes, innovate and increase productivity. In short, the promise of cloud computing is compelling – convert IT private networks to an on-demand, pay-as-you-go IT utility service that produces substantial savings for users.

Storm Clouds Gathering

While the benefits of the cloud are clear, the recent security breaches reported by Google highlight just some of the attendant risks. Google notified users that it inadvertently shared private Document and Spreadsheet materials with contacts that were never granted access to them. In response to cloud computing risks, The Electronic Privacy Information Center, an industry watchdog, has filed an FTC complaint to investigate the privacy and security measures of Gmail, Google Docs and Google’s other “cloud computing” services. Even John Chambers, Cisco Systems’ Chairman and CEO, has conceded that the computing industry’s move to an on-demand IT service on the Internet was “a security nightmare.” And, Microsoft now has joined the bandwagon and called on U.S. legislators to enact a “Cloud Computing Advancement Act.”

A 2009 World Privacy Forum report concludes that cloud computing “has significant implications for the privacy of personal information as well as for the confidentiality of business and governmental information.” Some of these risks are that:

a bankruptcy filing by a cloud provider can have a major impact on users, and the provider’s service agreement may not qualify as “intellectual property” under section 365(n) of the Bankruptcy Code;
the legal status of personal and business information (e.g., trade secrets) may be compromised or commingled with third party data, including that of competitors;
businesses may be legally barred from placing certain types of information on the cloud (e.g. legally privileged information, health records, financial records);
cloud providers may impose unreasonable privacy policies or terms of service;
the physical location of cloud provider servers around the world may result in trans-border information flow and subject information to the laws of multiple jurisdictions;
the cloud makes it more difficult to develop and enforce enterprise-wide information security policies for risk mitigation;
cyber attacks directed at cloud providers may impact a large population of unrelated users;
compelled disclosure by governmental and regulatory authorities or by private parties in E-Discovery may thwart existing legal protections; and
management would remain legally responsible for compliance with Sarbanes-Oxley requirements under Rule 404 even if internal controls on critical applications or data are delegated to a cloud provider.

It is interesting to note that United States v. Miller has held that an individual’s personal record held by a third party does not have the constitutional privacy protection as applies if the same record were held by the individual.

The Calm After the Storm

It is no surprise that cloud computing is an attractive potential service offering for any business looking to enhance IT resources while controlling costs. The cloud presents some compelling advantages over private networks. However, in light of the above legal uncertainties, we can expect continued cloud-related regulatory action and litigation in the coming years, which likely will result in the modification to existing laws and the enactment of new laws to deal with some of the unique aspects of this business model. Until these storms pass, prudent CTOs and executives considering migrating to cloud computing should seek guidance from competent counsel to ensure that any promised cost savings are in fact outweighed by the potential legal and business risks. While it is unclear today whether cloud computing will become a ubiquitous IT utility that makes private networks technologically obsolete, it is certain to continue expanding rapidly.

Luis J. Diaz is a Director in the Gibbons Intellectual Property Department.

The Written Description Requirements of 35 U.S.C. §112 and Ariad Pharms. Inc. v. Eli Lilly & Co.

William H. Epstein — Wed, 24 Feb 2010 17:09:40 -0500

Recently certain members of the patent law bar have expressed surprise that the Federal Circuit has used the written description requirements of 35 U.S.C. §112, first paragraph to invalidate patents such as the University of California’s patent directed to insulin in Regents of the University of California v. Eli Lilly & Co., and Genentech’s patent directed to production of human growth hormone in Genentech, Inc. v. Novo Nordisk A/S. This issue has come to the forefront again in Ariad’s pending per curiam appeal from the Federal Circuit decision in Ariad Pharms., Inc. v. Eli Lilly & Co., vacated and rehearing en banc granted. Oral argument in the case was held on December 7, 2009. In the case under appeal, the Ariad patent was held not to meet the written description requirements of 35 U.S.C. §112, first paragraph.

The surprise of the patent bar to the Federal Circuit’s use of this written description requirement and the dual nature of this requirement to invalidate patents reminds me of the exclamation of the police chief in the movie Casablanca, upon being handed his winnings from roulette, “I’m shocked, shocked to find that gambling is going on here.” Written description and the dual requirements of 35 U.S.C. § 112 first paragraph for written description have been the bulwark of United States prosecution, especially interference practice for at least 35 years.

The Dual Requirements for Written Description Are Part of 35 U.S.C. §112

With respect to a patent specification, the first paragraph of 35 U.S.C. § 112 sets forth that the specification shall contain a written description of:

the invention; and
the manner of making and using the invention (the enablement requirement)

Therefore, there are two requirements set forth in this statute with respect to the written description, one as to the invention and the other as to enablement (the manner of making and using the invention). The case of In re Barker, 194 U.S.P.Q. 474 (C.C.P.A. 1977) explicitly articulated that 35 U.S.C. §112 first paragraph set forth these two separate requirements for written description. To provide a written description of the invention, the specification must include a written description of each and every element of the claimed subject matter. This was enunciated by the Federal Circuit in Lockwood v. American Airlines. In the Lockwood case, the Federal Circuit specifically stated that:

It is the disclosure of the application that counts. Enablement of a filing date does not extend to subject matter which is not disclosed but which would be obvious over what is expressly disclosed.

The Written Description Requirement Has Been The Backbone of U.S. Patent Law Well Before 1967

The requirement for written description was reiterated by the C.C.P.A. in In re Ruschig. In Ruschig, the C.C.P.A. specifically held that a description of a genus does not constitute a description of a claimed subgenus unless that specific claimed subgenus is specifically described in the specification. The Ruschig case was directed to whether the specification contained a written description of a specific claimed compound. The claimed compound in Ruschig had a phenyl group substituted with chlorine and the C.C.P.A., in a prosecution and interference setting, held that there was no written description of this compound even though the application disclosed that phenyl ring could be substituted with chlorine or bromine. Discussing the written description requirement of 35 U.S.C. §112, first paragraph, the C.C.P.A. stated as follows:

Appellants refer to 35 USC 112 as the presumed basis for this rejection and emphasize language therein about enabling one skilled in the art to make the invention, arguing therefrom that one skilled in the art would be enabled by the specification to make chlorpropamide. We find the argument unpersuasive -- the question is not whether he would be so enabled but whether the specification disclosed the compound to him, specifically, as something appellants actually invented.

379 F.2d at 995.

Ariad May Not Affect the Law as to the Written Description Requirement and Its Dual Nature

The outcome of the per curiam appeal in the Ariad case may not affect the law as to the written description requirement and its dual nature because the appeal does not challenge these requirements for written description. The issue in Ariad is whether the describing of a claimed method which utilizes a compound to regulate by altering the transcription factor of specific genes to express proteins is sufficient to provide a written description for this method, even though no specific compound is disclosed for such regulation. Therefore, the Ariad application claims the use of any compound which provides a specific function and the issue is whether this description is sufficient for a written description of the invention and to enable the invention. The issue presented in Ariad is not directed to the fact that there is no new matter claimed which is not disclosed but whether the written description of the invention in chemical and biotech cases requires the definition of compounds by structure, formula, chemical name or physical properties and not by function. Therefore, the Ariad case never really challenges the basic requirements of 35 U.S.C. §112 for written description that, for at least 40 years, have and remain instrumental to the operation of the U.S. patent system.

William H. Epstein is Counsel to the Gibbons Intellectual Property Department.

Biosimilars: Data Exclusivity and the "Patent Protection Gap"

Lisa H. Wang — Wed, 17 Feb 2010 16:13:58 -0500

Several bills are currently pending in Congress establishing expedited marketing approval pathways for biosimilar drugs. The proposed pathways are analogous to the pathway for small molecule chemical drugs established by the passage of the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act includes a data exclusivity provision whereby the FDA is prohibited from approving a competitor’s drug application relying on the innovator’s data for a statutory period of time. Recent debates concerning the biosimilar bills have focused on the data exclusivity period. These debates highlight the differences between biological drugs and small molecule chemical drugs and why a longer exclusivity period may be necessary to fill the “patent protection gap.”

Debate on Data Exclusivity Period

Under the Hatch-Waxman Act, a five-year exclusivity period is permitted for a new chemical entity. A three-year exclusivity period is permitted for new clinical investigations of small molecule drugs and other exclusivity periods are granted as incentives to develop drugs for children or small patient populations. With regard to biosimilars, proposals on data exclusivity terms have ranged from no exclusivity period to over 12 years. House bill H.R. 1427 sponsored by Representative Henry Waxman provides for five years of exclusivity while H.R. 1548 sponsored by Representative Anna Eshoo provides for an exclusivity period of up to 14.5 years. An FTC report questions whether any data exclusivity period is necessary, suggesting that existing patent protection and market-based pricing would offer sufficient incentive for biological drug development. The Biotechnology Industry Organization (BIO) counters that the FTC’s report failed to account for the advantage given to follow-on companies who rely on the innovator’s development and research work. In addition, BIO also notes that reliance on patent protection for biological drugs may be inadequate since the biosimilar regulatory approval pathway creates a “patent protection gap.”

Patent Protection Gap

According to BIO, a “patent protection gap” exists because a biosimilar drug is not required to be the “same” as the innovator drug. Representative Waxman’s bill requires only that the biologically similar drug have “no clinically meaningful differences between the biological product and the referenced product would be expected in terms of the safety, purity and potency if treatment were to be initiated with the biological product instead of the referenced product.” In other words, if the biosimilar drug is shown to have no “clinically meaningful difference” when compared to the innovator drug, it can theoretically gain approval even though the biosimilar drug may be different in structure, administration, or mechanism of action.

Differences Between Biological and Chemical Drugs

One of the critical differences between biological drugs and chemical drugs is that biological drugs are made by living cells whose DNA has been modified by introduction of the gene of interest to synthesize the active component. Compared to small molecule drugs made up of only a few dozen atoms, biological drugs can consist of many thousands of atoms making up the protein, which is folded into a complex three-dimensional structure. Living cells synthesizing biological drugs must be grown and maintained in a highly controlled sterile environment and any contamination (viruses, bacteria, mold, etc.) can have catastrophic consequences. The innovator company may seek to protect products and processes -- including gene isolation, cell-line creation, maintaining cell growth and isolation and purification of the biological drug from the cells -- through patents or trade secrets. Follow-on companies will not likely have access to the products or processes and will likely seek to design around any relevant patents.

Argument for a Longer Exclusivity Period

BIO argues that recent trends have been towards narrowing biotech patents, and therefore a substantial exclusivity period is necessary because reliance on patents alone cannot guarantee incentives to foster innovation of biological drugs. This argument may have some support. In an unpublished paper, two law professors stated that for composition of matter patents on biotech drugs:

There does not appear to be a single appellate-level decision in which a patent on the active ingredient of a biotech drug has been found valid and infringed.

The paper also noted that competitors can circumvent patent protection by shifting production of the biotech drugs to foreign countries where no patent protection exists or where enforcement is weak or nonexistent. Although the paper concludes that multiple barriers exist to entry of biosimilars thereby promoting competition and lowering costs, it agrees that a reasonable basis exists for a twelve-year exclusivity term to support innovation of biological drugs.

It appears that a longer term data exclusivity period may be gathering support as a number of organizations and legislators were recently reported to back follow-on biologics bills containing 12-year data exclusivity terms.

The exclusivity debates mark the ongoing dialog in establishing a regulatory pathway for biosimilar drugs. In the upcoming months, we will explore, in a series of posts, the legal and regulatory landscape concerning biosimilars and any notable commercial activities by the pharmaceutical industry as they relate to patents.

Lisa H. Wang is an Associate in the Gibbons Intellectual Property Department.

Duty of Disclosure: Applicant's Contradictory Statements to EPO and USPTO Support Finding of Inequitable Conduct

Frank A. Bruno — Fri, 12 Feb 2010 11:59:44 -0500

The Federal Circuit’s recent decision in Therasense, Inc. v. Becton, Dickinson & Co., No. 2008-1511 (Fed. Cir. Jan. 25, 2010) held that applicant’s statements made in proceedings before foreign patent offices may be required disclosures in prosecution before the USPTO (“PTO”), particularly when those statements directly contradict other statements made during prosecution. From the court’s holding: “An applicant’s earlier statements about prior art, especially one’s own prior art, are material to the PTO when those statements directly contradict the applicant’s position regarding that prior art in the PTO.”

The Therasense case involved U.S. Pat. No. 5,820,551, for a strip electrode used to measure the level of glucose in blood. The ‘551 patent is related to an earlier U.S. patent and its European counterpart. The statement “Optionally, but preferably when being used on live blood, a protective membrane surrounds both the enzyme and the mediator layers, permeable to water and glucose molecules” appeared in the specifications of all three patents.

In 1993, the European patent was revoked in an opposition proceeding based on a German reference. In a successful appeal to withdraw the revocation, the patentee distinguished the patented invention’s “optionally, but preferably” membrane requirement from the German reference, which required a membrane.

A few years later, during prosecution of the ‘551 patent, the prosecuting attorney, who was familiar with the EPO opposition proceedings, established a new point of novelty before the USPTO to advance the prosecution of the ‘551 patent. That new point of novelty was that never before was the sensor known to work without a membrane. This assertion directly contradicted an earlier statement made by the applicant during the EPO opposition proceedings. See Therasense at pages 19–23.

The Federal Circuit affirmed the district court’s finding of invalidity of U.S. Pat. No. 5,820,551 due to inequitable conduct by applying the standard recently summarized by the Federal Circuit in McKesson Info. Solutions, Inc. v. Bridge Med., Inc.

To establish inequitable conduct by failure to disclose, the asserting party must show materiality of the information and the intent to deceive. The trial court held that the prosecuting attorney knew that to disclose the EPO opposition arguments would defeat the patent grant before the USPTO. The trial court then balanced the levels of materiality and intent, and found the withheld information “richly material” and that the prosecuting attorney had no explanation for his conduct, and that this was proved by clear and convincing evidence.

As we previously posted, a patent applicant’s duty of disclosure may also extend to references and office actions in “similar” but unrelated, co-pending patent applications. The Therasense and McKesson cases show continued development in the caselaw of inequitable conduct. Stay tuned for future developments.

Frank A. Bruno is a Director in the Gibbons Intellectual Property Department. Lucy Emhardt, an Associate in the Gibbons Intellectual Property Department, assisted in the preparation of this post.

New ICANN Electronic UDRP ("eUDRP") Procedures for Domain Name Disputes

Gibbons P.C. — Tue, 02 Feb 2010 13:45:53 -0500

Last month, ICANN announced that its Board had approved changes to the Rules for the Uniform Domain Name Dispute Resolution Policy (“Rules”) providing for electronic filing of UDRP documents. Under the modified Rules, electronic filing will become mandatory effective March 1, 2010.

Both the World Intellectual Property Organization (“WIPO”) and the National Arbitration Forum (“NAF”) were quick to implement the paperless filings. WIPO began accepting paperless filings on December 14, 2009. The WIPO eUDRP procedures are explained in its new Supplemental Rules, Model Complaint and Filing Guidelines.

Similarly, the NAF began accepting paperless filings on December 29, 2009. The NAF has an opt-in form for parties to elect to participate in its paperless filing program prior to the mandatory eUDRP launch this coming March. NAF’s procedures are explained in its new Supplemental Rules, and it has prepared a new transmittal sheet for use in commencing a paperless proceeding.

Overall, the change to eUDRP is likely to be seen as a welcome improvement. In addition to being greener, eUDRP may further streamline resolution of UDRP proceedings. In fact, WIPO recently announced that its first eUDRP proceeding was resolved in just 37 days, and that user reactions to the new paperless procedures have been “highly positive.” We welcome comments on your experiences using the new eUDRP procedures.

Admissibility of Expert Testimony: Patent Law v. Federal Rules of Evidence

Erich M. Falke — Tue, 26 Jan 2010 14:55:40 -0500

Judge Young recently wrote a colorful and entertaining decision addressing a “disconnect between the Federal Rules of Evidence and the substantive doctrines of patent law [that] seems to have gone totally unremarked both by the patent bar and evidence scholars.” In the end, Judge Young ruled that the patent laws on obviousness trump the Federal Rules of Evidence. NewRiver, Inc. v. Newkirk Products, Inc., C.A. No. 06-12146-WGY, Memorandum & Order (D. Mass. Dec. 16, 2009).

Plaintiff NewRiver brought a patent infringement action against the defendant Newkirk. After trial, the jury returned a verdict finding that Newkirk infringed claims 9-11 but that certain claims of the patent in suit, including the infringed claims 9-11, were invalid as obvious. The parties then filed various post trial motions including two filed by NewRiver: (1) a motion for judgment as matter of law that claims 9-11 are valid and not obvious; and (2) a motion for a new trial.

The Court reviewed the sufficiency of the evidence regarding the invalidity of claims 9-11, and found that evidence “sparse.” Indeed, the only evidence of invalidity of claims 9-11 consisted of the defendant’s expert reading the claim into evidence and concluding that the claims would have been obvious to a person skilled in the art. The expert did not identify any prior art, did not show where the limitations of the claims were in the prior art, or how the combined prior art references made the claims obvious. NewRiver did not object, and the issue of invalidity of claims 9-11 went to the jury with the only evidence being the expert’s unsupported opinion.

While considering the post trial motions, the Court examined the Federal Rules of Evidence to consider whether the expert’s testimony met the evidentiary threshold. In particular, the court examined the following relevant Federal Rules of Evidence which state:

Rule 704 . . . testimony in the form of an opinion or inference otherwise admissible is not objectionable because it embraces an ultimate issue to be decided by the trier of fact.

Rule 705 . . . The expert may testify in terms of opinion or inference and give reasons therefor without first testifying to the underlying facts or data, unless the court requires otherwise. The expert may in any event be required to disclose the underlying facts or data on cross-examination.

Rule 103 . . . (a) Error may not be predicated upon a ruling which admits or excludes evidence unless a substantial right of the party is affected, and (1) Objection. In case the ruling is one admitting evidence, a timely objection or motion to strike appears of record, stating the specific ground of objection, if the specific ground was not apparent from the context . . .

The Court stated the expert’s opinion, while conclusory and unsupported, not only satisfied the evidentiary threshold, but fit these rules “as the hand the glove.” But the Court further noted that the Federal Circuit’s Koito decision made clear that, on the issues of anticipation, obviousness, and doctrine of equivalents, the unsupported opinion even of a qualified expert is simply not “substantial evidence” adequate to support a jury verdict. The District Court further explained the tension between the patent laws and the Federal Rules of Evidence:

The central holding of Daubert runs precisely to the contrary – lower federal courts are not permitted to engraft additional hurdles on the admissibility of evidence beyond those found in the Rules themselves. Despite the express teaching of Daubert, this is exactly what Federal Circuit jurisprudence does, at least on the issues of anticipation, obviousness, and doctrine of equivalents.

Notwithstanding Rules 704 and 705, Federal Circuit case law renders legally inadequate the opinions of qualified experts on the ultimate issues of anticipation, obviousness, and doctrine of equivalents unless the bases therefor are spelled out on the record.

Although the tension between the Federal Rules of Evidence (with their statutory authority) and the decisions of the Federal Circuit (with their precedential authority) seems irreconcilable, it is not open to a district court to chose one in disregard of the other. Both requirements necessarily must be followed. (citations and footnotes omitted)

After recognizing the tension between the two areas of law, the Court noted that the expert’s opinion was fatally flawed since its bases were never explained and the jury therefore was not entitled to credit. Absent the expert opinion, the jury had no basis to resolve the issue of obviousness of claims 9-11 and the matter ought not have been given to them to consider. The Court then ordered a new trial on the issues of infringement and invalidity of claims 9-11.

After being illuminated to the hidden disconnect between the two areas of law, Judge Young stated that he would revise his judicial procedures to avoid this issue by, at the earliest possible moment when an expert opinion is proffered on the issues of obviousness, anticipation, written description, or doctrine of equivalents, ruling sua sponte on the adequacy of the testimony. In this manner, Judge Young noted that Judge Lungstrum’s thoughtful opinion in Sprint v. Vonage No. 05-2433, 2007 WL 2572417, at *2 (D. Kan. 2007) would serve as a useful guide.

As a practical matter and to avoid the situation presented in this case, patent litigators should carefully scrutinize all expert testimony being offered by the opposing party. If such testimony lacks the requisite basis, appropriate preemptive relief should be obtained (e.g. through a motion in limine).

Erich M. Falke is Counsel to the Gibbons Intellectual Property Department.

Limits on Number of Claim Terms to be Construed

Wendy R. Stein — Wed, 20 Jan 2010 16:21:04 -0500

Some courts, whether by local patent rule or by individual order, are restricting the number of patent claim terms they are willing to construe. For example, the Northern District of California’s Local Patent Rule 4-1(b) directs parties to “jointly identify the 10 terms likely to be most significant to resolving the parties’ dispute, including those terms for which construction may be case or claim dispositive.” Other courts, such as the District of Massachusetts, have memorialized a suggestion that “no more than ten (10) terms per patent be identified as requiring construction.” See Appendix to D. Mass. Local Rule 16.6, section (B)(4)(d).

In jurisdictions with local patent rules but without specific rules limiting the number of terms that the court will construe, some judges are going beyond the local rules to impose such limits. For example, Judge Clark of the Eastern District of Texas has required parties to identify “no more than ten (10) disputed claim terms for construction,” in order to “secure the just, speedy and inexpensive determination” of the case. Hearing Components, Inc. v. Shure, Inc., Civ. No. 9:07-104, 2008 WL 2485426, at *1 (E.D. Tex. June 13, 2008). There, the parties had originally submitted about twenty terms for construction.

In other jurisdictions without specific local patent rules, some judges have likewise imposed limits on the number of terms they will construe. For example, Judge Sleet of the District of Delaware struck a joint claim construction chart that contained competing constructions for thirty-one claim terms or phrases spanning four patents. See Grape Technology Group, Inc. and KGB, Inc. v. Jingle Networks, Inc., Civ. No. 08-408 (D. Del.), Docket Entry 35 (Order dated Oct. 20, 2009). There, the Court ordered the parties to file an amended claim construction chart within five days, limited to ten disputed terms per patent-in-suit.

Similarly, in a case where the parties requested construction of sixteen terms, Judge Crabb of the Western District of Wisconsin denied the parties’ requests for an early claim construction hearing, stating that “neither [party] met its burden with respect to the need for claims construction.” Semiconductor Energy Laboratory Co., Ltd. v. Samsung Elec. Co., Ltd., No. 09 cv-01, 2009 WL 3731959, at *1 (W.D. Wis. Nov. 4, 2009). In Samsung, the Court issued an order requiring the parties to “persuade the court that construction of each specified term [wa]s necessary to resolve a disputed issue concerning infringement or invalidity.” The Court had issued this order to “avoid devoting judicial resources to the issuance of advisory opinions on the construction of claim terms about which the parties ha[d] no concrete dispute.”

Practice tip: When litigating a patent infringement case, in addition to studying any local patent rules that may be in effect in the jurisdiction in which you are litigating, it is advisable to review decisions by your particular judge and others in the district to see whether the court has been imposing limits on the number of terms they will construe, and if so, be prepared to limit the number of terms and phrases to those most important to your case.

Wendy R. Stein is an Associate in the Gibbons Intellectual Property Department.

CONSUMERS FAIL TO MAKE THEIR MARK: Pro Se Plaintiffs Initiating Qui Tam Suits Under The False Marking Statute Face Uphill Battle

Thomas R. DeSimone — Fri, 15 Jan 2010 04:42:39 -0500

What do adjustable bow ties have in common with disposable coffee cup lids? Not much, other than the fact that they have recently been at the center of false patent marking suits brought against major corporations not by competitors, but consumers. In each case, a consumer noticed that markings on certain products referred to patents which had long since expired.

While most ordinary consumers would not attribute much significance to such a finding, these were no ordinary consumers. They were patent attorneys who, by virtue of their profession, were familiar with the false marking statute of the Patent Act. So when Matthew Pequignot sat down to his morning coffee and noticed that the lid of his cup was marked with an expired patent, he proceeded to file Pequignot v. Solo Cup Company. And when Raymond Stauffer noticed that his Brooks Brothers adjustlox bow-tie was affixed with an expired patent number, he initiated Stauffer v. Brooks Brothers, Inc.

Pequignot v. Solo Cup Company

In Pequignot, Solo Cup initially moved to dismiss for failure to state a claim. Judge Leonie M. Brinkema denied the motion, holding that marking an article with an expired patent number was tantamount to a false marking under the statute. The court found that an article once protected by an expired patent was no different than an article that had never been covered by a patent. The court next denied Solo Cup’s motion to dismiss for lack of subject matter jurisdiction, finding that although Pequignot did not have traditional standing under Article III of the Constitution, the false marking statute was a true qui tam statute, and Pequignot was entitled to recover as an assignee of the government’s claim for any harm that resulted from the false marking of products.

Pequignot’s suit was ultimately derailed on summary judgment when Solo Cup produced evidence that it had relied upon advice from counsel that it was permissible to mark the articles after the patent had expired, taking into account that it would have cost Solo Cup nearly $ 2 million to replace the equipment used to produce the marked lids. Solo Cup’s outside attorneys had advised that such expensive and burdensome steps were unnecessary so long as the equipment was replaced with non-marked substitutes as the parts wore out over time.

Last, the court determined that Pequignot’s suggested construction of the term “offense” to mean “each article” was unsupported. Judge Brinkema held that an “offense” was to be defined as a distinct decision by a defendant to falsely mark an article. Although this issue was not case dispositive, it may be subject to attack on appeal based on Federal Circuit's recent holding in The Forest Group, Inc. v. Bon Tool Company. In that case, the Federal Circuit held that the statutory fine should be assessed on a "per article" basis as opposed to the "per decision to mark" basis favored by Judge Brinkema.

Stauffer v. Brooks Brothers, Inc.

Stauffer’s suit was deemed dead on arrival, and was dismissed for lack of standing. The hypothetical nature of the allegations found within Stauffer’s complaint proved fatal. Stauffer’s allegation that Brooks Brothers’ conduct “wrongfully quelled competition with respect to such bowtie products thereby causing harm to the economy of the United States” was rebutted by declarations and exhibits submitted by Brooks Brothers showing that the adjustolox mechanism was not made by the defendants, but instead by a third party that also sold the mechanism to Brooks Brothers competitors, which actually fostered competition. Finding the standing issue to be dispositive, the court declined to address the failure to state a claim motion.

Lessons For Business Owners

Although the false marking suits brought by Pequignot and Stauffer have to date proved to be unsuccessful (both cases are currently on appeal before the United States Court of Appeals for the Federal Circuit), the suits could have been avoided entirely with some simple preventative planning on the part of the defendants. If it is not feasible to remove an expired patent number, a company should be prepared to produce evidence to that effect. Widely available services such as the USPTO’s internet patent database, and Google’s Patent Search, make it easier than ever for a consumer to access information about almost any patent marking affixed to any product. In a struggling economy, a large corporation with some improperly marked products could provide a tempting target for an enterprising consumer. Even if the likelihood of a plaintiff winning such a suit is remote, companies should take proactive steps to avoid becoming embroiled in litigation.

Thomas R. DeSimone is an Associate in the Gibbons Intellectual Property Department.

Supreme Court Denies Certiorari in Trademark Challenge to Washington Redskins Name

Catherine M. Clayton — Tue, 12 Jan 2010 14:37:37 -0500

On November 16, 2009, the Supreme Court denied a petition for certiorari in the case of Harjo v. Pro-Football, Inc. The underlying action was brought by Native American activists (“Harjo”) who challenged the Washington Redskins’ right to register its team name and logos on the basis that they are scandalous, disparaging and may bring Native Americans into disrepute or contempt. Marks that do any of those things are not entitled to registration, as provided by Section 2(a) of the Lanham Act, 15 U.S.C. § 1052(a). The sole issue submitted for the Supreme Court’s review, however, was whether the activists’ claim was barred by laches, as found by the U.S. Court of Appeals for the D.C. Circuit.

Under the Lanham Act, the grounds on which a trademark registration may be cancelled become limited once the registration has existed for five years. For example, after that point, no challenge may be brought on the basis that the mark is merely descriptive. However, the Lanham Act specifies that certain claims may be brought “at any time,” including that a mark is disparaging, that it has been abandoned, or has become generic. 15 U.S.C. § 1064(3).

The issue submitted for the Supreme Court’s review arose out of a Trademark Trial and Appeal Board (“TTAB”) proceeding in which Harjo sought cancellation of a number of the Redskins’ registrations on the basis that the marks are disparaging and scandalous. On April 2, 1999, the TTAB ruled for Harjo on the issue of disparagement and ordered that the registrations be cancelled. Harjo, 50 U.S.P.Q.2d 1705 (TTAB 1999). The Washington Redskins then appealed that decision to the U.S. District Court for the District of Columbia, and that court held that the activists’ claim was barred under the doctrine of laches, i.e. that the activists had waited too long to bring the claim. Pro-Football v. Harjo, 284 F. Supp.2d 96, (D.D.C. 2003). The activists then appealed that decision. The gist of their argument was that laches may not bar a claim that the law explicitly states may be brought “at any time.” The U.S. Court of Appeals for the District of Columbia did not agree, and it affirmed the lower court’s decision on May 15, 2009. Pro-Football, 565 F.3d 880 (D.C. Cir. 2009). The activists then petitioned the Supreme Court for certiorari.

That the Supreme Court has refused to hear this action does not mean that the Redskins’ registrations will stand indefinitely. Another challenge, Blackhorse v. Pro-Football, Inc., is pending before the TTAB, brought by a group of Native Americans who had only recently reached the age of majority (i.e. the age at which the laches clock starts ticking for individuals) at the time their complaint was filed. That proceeding was suspended pending outcome of the Harjo action, and is expected to move forward in view of the Supreme Court’s decision to deny certiorari. So, while the Washington Redskins may have prevailed in Harjo, it remains to be seen how the challenge to the nature of its marks will be resolved.

Catherine M. Clayton is a Director in the Gibbons Intellectual Property Department.

Copy Machine or Copy Service? "Volitional Conduct" and Direct Copyright Infringement

Gibbons P.C. — Wed, 06 Jan 2010 12:01:07 -0500

Is a technology provider liable for direct copyright infringement when it provides the means for infringement instructed by its users? In the Cablevision case, Cartoon Network, LP LLLP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008), the Second Circuit endorsed a line of cases holding that the provider is not liable absent “volitional conduct” that causes the copying to take place. Two recent district court decisions in the Southern District of New York appear to have applied this rule in seemingly inconsistent fashion.

Most recently, in Cellco P'ship v. Am. Soc'y of Composers, 2009 U.S. Dist. LEXIS 95630 (S.D.N.Y. Oct. 14, 2009), the court held that Verizon was not liable for direct copyright infringement where it provided the technology that allowed cell phone users to play ringtones. The opposite result was reached a few months earlier in Arista Records LLC v. Usenet.com (PDF), 633 F. Supp. 2d 124 (S.D.N.Y. 2009), in which the court found the defendants were directly liable where they provided the technology that allowed users to download infringing sound recordings. How can we make sense of these outcomes?

Cablevision
We begin with a quick overview of Cablevision, in which the Second Circuit held that Cablevision’s Remote Storage DVR System (“RS-DVR”) technology did not directly infringe the plaintiffs’ content. The Second Circuit noted that direct infringement could not be proven unless “volitional conduct” could be established. The Second Circuit found Cablevision’s conduct was analogous to a store proprietor who charges customers to use a photocopier on his premises, and unlike that of a copy service that makes copies at the customer’s request. As such, Cablevision was not directly liable.

The Cablevision decision was rooted in Religious Technology Center v. Netcom On-Line Communications Services, Inc., 907 F. Supp. 1361 (N.D. Cal. 1995), which held a bulletin board operator and internet service provider were not liable for direct copyright infringement where they provided access to a Usenet newsgroup containing infringing material:

These parties who are liable under plaintiffs’ theory, do no more than operate or implement a system that is essential if Usenet messages are to be widely distributed. There is no need to construe the Act to make all of these parties infringers. Although copyright is a strict liability statute, there should still be some element of volition or causation which is lacking where a defendants’ system is merely used to create a copy by a third party.

The Netcom court seemed troubled with the fact that under plaintiff’s theory of direct infringement, the entire internet would commit an act of direct infringement when a unauthorized copyrighted work was transmitted through its interconnected network of computers. The court did not believe that such a result was warranted by the Copyright Act. Netcom was followed by the Fourth Circuit in CoStar Group, Inc. v. LoopNet, Inc., 373 F.3d 544 (4th cir. 2004).

Cellco
The Cellco decision followed the Netcom and Cablevision line of cases to hold that Verizon was not liable for direct infringement of the public performance right when users downloaded ringtones, or when ringtones were played on users’ phones. As in the Cablevision case, when attempting to determine if there was requisite volitional conduct, the court analyzed the manner in which a ringtone is activated:

Once the customer has downloaded the ringtone onto her telephone, she controls the telephone and makes the decisions that determine whether the ringtone will be triggered by an incoming call signal. And of course, it is someone else entirely -- the caller -- who has initiated this entire process.

Usenet.com
In Arista Records LLC v. Usenet.com, the court held that the owners and operators of the Usenet.com website directly liable for facilitating the posting and downloading of unauthorized copies of plaintiffs’ sound recordings. In finding the volitional conduct requirement satisfied, the court relied upon the facts that defendants were aware that digital music files were among the most popular articles on their service and took active measures to create special servers dedicated to MP3 files. The defendants also took active steps, including both automated filtering and human review, to remove access to certain other categories of content (such as adult material), and to block certain users. Such activities, the court held, transformed defendants from a passive conduit where infringing activities happened to occur, to active participants in the process of copyright infringement.

The Takeaway
It’s not easy to reconcile Usenet.com with Cablevision and Netcom. The defendants in Usenet.com certainly did not aid their case by engaging in spoliation of evidence and discovery misconduct. The district court was clearly correct in finding secondary liability for inducing infringement, contributory infringement and vicarious infringement. Instead of stopping there, the court went further, finding defendants sufficiently actively engaged in the process to be directly liable. Perhaps the analogy is to the proprietor of a high speed copy machine standing outside a bookstore inviting people to reproduce their newly purchased books. The district court decision suggests that, in such situations, the door remains open to a finding of direct infringement.

Thomas R. DeSimone, an Associate in the Gibbons Intellectual Property Department, assisted in the preparation of this post.