America Invents Act Provides a New Tool to Influence the Prosecution of Patent Applications with New Third Party Submission Rules

January 12, 2012 By Leave a Comment
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Last week the Patent Office proposed a new rule for preissuance submissions to implement the new requirments of the America Invents Act enacted in September of last year.  Previously, third party submissions of prior art to the Patent Office were very limited in that there was a short deadline for filing the submission and the third party could not include any analysis of the prior art submitted. The new third party submission law established by the America Invents Act is effective September 16, 2012, retroactive for all applications filed before that date.

Under the new rule, preissuance submissions will become a power tool for those with an interest in the denial of a patent application because now the third party can provide analysis of the prior art.  For example, if applicant mischaracterizes the prior art in the application, the record can be set straight with a third party submission.  The deadline for the submission under the new rule will be the earlier of 1) the date of the notice of allowance or 2) six months after publication of the application or the date of first rejection of any claim by the examiner, whichever is later.  So generally speaking, the deadline for any such third party submissions will be the date of the first office action.  Under current rules, the submission must be made within two months of publication of the application, and no analysis can be provided.  Because of the short time frame and the inability to provide analysis to the examiner, the procedure is not currently deemed as very effective in most cases and could in fact be detrimental because the third party could no longer argue to the court in an infringement action that the reference was not considered by the examiner.

Under the rule proposed by the Patent Office, the documents submitted must be “of potential relevance to the examination of the application” and a concise description of the relevance of each document must be provided.  Moreover, it is not required that the documents be “prior art” under the new rule–any relevant documents can be submitted for consideration by the examiner.  Concise submissions are encouraged–the proposed rule allows for three “free” submissions.  If more than three documents are submitted, a fee of $180 for each ten documents is required.  Finally, there is no longer a requirement to serve the applicant with the submission, but the applicant will receive notice of any such submission in the first office action.

As a result of the new rules for third party submission, and in light of the post grant review procedure that will come into effect in the future, it will be ever more important for companies to exercise vigilance in the monitoring of published patent applications.  Otherwise, you will not be able to take advantage of these new rules designed to help companies avoid finding themselves on the receiving end of a patent infringement lawsuit asserting an invalid patent.  The tool could be particularly useful in patent litigation where a continuation application is pending that has been crafted to read more closely on the alleged infringing method or apparatus.

 

Filed Under: America Invents Act, Patents

America Invents Act: A Sea Change in Patent Law

January 7, 2012 By Leave a Comment
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President Obama signed the Leahy-Smith America Invents Act (AIA) into law on September 16, 2011.  The AIA is the first major change in the U.S. patent law system since 1952 and probably the most far reaching statutory changes since the 1836 Patent Act established the Patent Office and the modern system of patent examination.  The changes include substantive changes to the standards of patentability as well as significant changes to the way the Patent Office handles challenges to the grant of a patent.

Some parts of the law went into effect upon enactment, but the more significant changes will go into effect at various times in the future.  It will be years before we are fully converted to the new system, and practitioners must keep track of both the current law and the new law in the interim.

Although the AIA did not include venue or damages reform that was in past versions of patent reform legislation, it did include an anti-joinder rule in patent cases.  The new anti-joinder rule prohibits the joinder of multiple defendants in the same patent case just because they have infringed the same patent(s).  Rather, joinder is now only proper if the defendants all allegedly infringe the patent with the same product or process.

The anti-joinder rule went into effect on September 16, 2011 and has resulted in a decrease in the number of defendants that are sued in a single case, particularly in the Eastern District of Texas.  Although the full effect of the new anti-joinder provision remains to be seen, it will likely result in more cases being filed in venues other than the Eastern District of Texas.  Delaware, for example, has seen an increase in the number of patent cases filed there given that many corporations are incorporated in Delaware.

Another significant change of the American Invents Act is the conversion from a “first to invent” to a ”first to file” patent system that will go into effect for patent applications with an effective filing date on or after March 16, 2013.  Under the current system, the first person to invent is generally entitled to a patent even if another inventor files an application first.  The first to file rule is not absolute, however.  For example, a new “derivation proceeding” will allow a second filer to obtain a patent upon proof that the first filer derived the invention from the second filer.

A number of changes to patent office procedure will go into effect on September 16, 2012, including a new third party submission procedure, post-grant review, and inter partes review.  These new procedures will affect strategies for both obtaining patent protection and defending against the patents of others.

To avoid getting caught behind the curve, it is important for companies to plan for the changes in the law now and to implement strategies to take advantage of the new laws.  Without proper planning, valuable patent protection may be lost or the ability to operate freely may be impeded by the patents of others.

Filed Under: America Invents Act, Patents

Willful Blindness: The New Standard for Knowledge in Active Inducement of Patent Infringement

September 16, 2011 By Leave a Comment
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In a decision earlier this year that will have ramifications in numerous areas of the law where “knowledge” must be proven, the U.S. Supreme Court applied the doctrine of willful blindness to satisfy the knowledge element for a claim of active inducement of patent infringement. Although the willful blindness doctrine has been well established in criminal law and adopted by every federal court of appeals but one, the Global-Tech Appliances decision marks the first time the Court has approved the doctrine.

In a dissenting opinion, Justice Kennedy noted that the Court appeared to endorse the willful blindness doctrine for all federal criminal cases without receiving briefing or argument on this important issue from the criminal defense bar.

Under the willful blindness standard, the plaintiff must prove 1) the defendant believed that there is a high probability that a fact exists and 2) that the defendant took deliberate actions to avoid learning of that fact.  Using this standard, the Court defined a willfully blind defendant as “one who takes deliberate actions to avoid confirming a high probability of wrong doing and who can almost be said to have actually known the critical facts.”

In the case at bar, Pentalpha copied one of SEB’s deep fryers that was made for sale in Hong Kong and thus lacked any U.S. patent markings. Although Pentalpha retained an attorney to perform a patent search, Pentalpha did not inform the attorney that that the design was a copy of SEB’s design.  The attorney did not find SEB’s patent and issued an opinion that Pentalpha’s deep fryer did not infringe on any of the patents he had found.

Subsequently, Pentalpha began selling the knock-off deep fryers to Sunbeam in Hong Kong.  Sunbeam then imported and sold the fryers in the United States.  SEB sued Sunbeam for patent infringement and Sunbeam notified Pentalpha of the claim.  After settling with Sunbeam, SEB then sued Pentalpha for infringing its U.S. patent by actively inducing Sunbeam and other purchasers of Pentalpha fryers to sell them in the U.S. in violation of SEB’s patent rights.

Pentalpha argued that it had no knowledge of the patent, and thus, SEB could not prove the knowledge required to recover for active inducement of infringement of the patent.  The Federal Circuit held that the knowledge element was satisfied because of Pentalpha’s deliberate indifference to a known risk that a patent existed covering SEB’s fryer.

The Supreme Court rejected the deliberate indifference standard because it does not require active efforts by an inducer to avoid knowing about the infringing nature of the activities.  The Court also criticized the standard because it permits the finding of knowledge where there is merely a “known risk” that the induced acts are infringing.

Instead, the Court applied the willful blindness standard to affirm the holding of the Federal Circuit that Pentalpha had actively induced infringement of the patent by Sunbeam.  In reaching its decision, the Court found it significant that Pentalpha knew of  SEB’s superior product and knew that SEB’s fryer embodied advanced technology that would be valuable in the U.S. market.  The Court also pointed out that Pentalpha decided to copy an overseas model, knowing that products made for overseas markets usually do not bear U.S. patent markings.  Even more significant, according to the Court, was Pentalpha’s decision not to inform its patent attorney that the Pentalpha fryer was a copy of SEB’s fryer.

The Court could not fathom any other motive that Pentalpha had for withholding this information “other than to manufacture a claim of plausible deniability in the event that his company would later be accused of patent infringement.” Thus, the Court held that the evidence was more than sufficient for the jury to decide that Pentalpha subjectively believed that there was a high probability that SEB’s fryer was patented, that Pentalpha took deliberate steps to avoid knowing that fact, and therefore, Pentalpha had willfully blinded itself to the infringing nature of Sunbeam’s sales.

Although the willful blindness standard adopted by the Court is more restrictive than the Federal Circuit’s deliberate indifference standard, it is still not necessary to prove that the alleged infringer had actual knowledge that the product was covered by a patent.  The Court’s approval of the willful blindness standard as an alternative to proving actual knowledge could have wide reaching consequences, even outside the context of patent infringement.  The decision has already been cited in criminal cases, bankruptcy cases and in cases involving the False Claims Act.

Filed Under: Patents

The First Amendment Extends to Dillinger Tommy Guns

June 29, 2011 By Leave a Comment
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There has been significant activity over the past several years in the courts with regard to the First Amendment and how far it goes to protect the use of trademarks and the likeness of celebrities in video games.  I previously posted about the Madden NFL game and how the defendants were successful in a First Amendment Defense.

The Southern District of Indiana recently dismissed a case involving the use of “Dillinger” as the name of a weapon in the Godfather I and Godfather II video games.

The John Dillinger heirs sued EA under trademark infringement/right of publicity theories for using “Dillinger” and “Modern Dillinger” to refer to the Tommy Gun weapons available in the Godfather I and Godfather II games.  Although there were a number of issues raised in connection with a motion to dismiss/motion for summary judgment, the ultimate issue was whether EA had a First Amendment right to use “Dillinger” to refer to the weapons in the game.

In granting summary judgment for EA, the court applied the Second Circuit’s Rogers test, which requires an analysis of 1) whether the name used has any artistic relevance to the underlying work, and if so, 2) whether it explicitly misleads the public as to the source or content of the work.

In this case, the Godfather games were based on the novel and movie of the same name.  Neither the novel, nor the movie depicted John Dillinger.  However, it was undisputed that John Dillinger and Tommy Guns were closely related as that was Dillinger’s weapon of choice.  Because EA used the name to refer to Tommy Gun weapons in the games and the plaintiff presented no evidence of any confusion as to the source or content of the work, the First Amendment defense applies, the court held.  The court noted that even if it accepted plaintiff’s contention that the relationship between Dillinger and the games is attenuated, the threshold for “artistic relevance to the underlying work” is very low—it just needs to be above zero.

This is a good decision for game developers in that it presents a case where the artistic relevance of the use of the name to the underlying work is not as strong as it has been in other cases.  But the case will likely to be appealed to the Seventh Circuit according to plaintiff’s counsel.

It is important when developing a game to consider the artistic relevance of the use of celebrity names, likeness, and trademarks in video games.  Where there is no relevance, the courts have found that the First Amendment defense does not apply.

Filed Under: Trademarks, Trade Dress, and Unfair Competition

False Patent Marking: The New Gold Rush?

November 10, 2010 By 1 Comment
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The Federal Circuit’s Bon Tool decision late last year dramatically increased the number of false patent marking cases filed this year.  Historically, the relatively obsure patent marking statute had been interpreted to allow for a penalty of up to $500 for each decision to mark an unpatented product.  Consequently, there were only a handful of false marking suits pending at any given time. 

Times have changed.  The Bon Tool decision opened the flood gates for false marking claims because of the dramatic increase in potential damages to the plaintiff.  A plaintiff in a false marking suit can now recover up to $500 per item sold. 

As many predicted, plaintiffs have rushed to this newly discovered gold.  Over 500 false marking cases have been filed this year alone.  The Eastern District of Texas is the venue of choice, home to more than 200 of those cases.  The second highest number of cases has been filed in the Northern District of Illinois, with over 60 cases.  The Northern District of Texas comes in fourth place with more than 20 cases.

The false marking statute provides that whoever, for the purpose of deceiving the public, labels an unpatented product or advertises the product in a way that suggests that the product is patented or that an application for a patent is pending on the product when no application has been made, “shall be fined not more than $500 for every such offense.”  Any person may sue for the penalty, but half of the fine must be paid to the United States. 

The vast majority of the cases filed stem from claims that products are marked with expired patent numbers.  In Solo Cup, the Federal Circuit held that marking of a product with an expired patent number is considered marking an “unpatented” product. 

However, the Federal Circuit found that Solo Cup did not violate the statue because the plaintiff had failed to provide any evidence contradicting Solo Cup’s evidence of lack of intent to deceive the public.  In particular, Solo Cup provided evidence that it relied on advice of counsel in continuing to mark products with expired patent numbers.  Solo Cup also offered evidence that it was costly to change the molds that were used to manufacture its cups, thus prompting its decision to continue selling cups labeled with expired patent numbers. 

The Federal Circuit pointed out that the bar for proving deceptive intent is particularly high because the false marking statute is a criminal statute although the punishment is in the form of a civil fine.  Yet, the court cautioned that blind assertions of good faith without evidence to support the lack of intent to deceive would be insufficient to overcome the presumption of intent to deceive where a product is knowingly marked with an expired patent number. 

Defendants have been busy seeking dismissal of false marking cases at the pleading stage.  For example, in Stauffer v. Brooks Brothers, Brooks Brothers filed a motion to dismiss claiming that the patent attorney who filed the suit did not have standing under the statute because he did not suffer an injury as a result of the marking of bow ties with expired patent numbers.  The Federal Circuit reversed a dismissal of the case by the trial court, holding that Stauffer had standing to sue because he simply stepped into the shoes of the government.  Thus, no injury to the plaintiff need be shown. 

The Federal Circuit remanded to the trial court for determination of Brook Brothers’ motion to dismiss for failure to adequately allege intent to deceive.  Thus, while any individual has standing to bring suit under the statute, it may prove difficult without discovery in many cases for the plaintiff to allege particular facts supporting intent to deceive.  If the Federal Circuit ultimately requires pleading of particular facts for false marking cases on the ground that it is a criminal statute, the gold rush may be curbed.

Legislation has also been introduced in Congress aimed at reducing the number of false marking cases.  But experts predict that patent reform will not pass anytime soon unless a bipartisan bill is introduced.

Nevertheless, companies should not rest on their laurels waiting for the Federal Circuit or Congress to reign in the false marking suits.  It is critical to take steps now to ensure accurate marking of products.  The existence of a compliance program will go a long way toward rebutting the presumption of intent to deceive the public in a false marking case. 

So while false marking claims may prove to be a gold rush of sorts, in any gold rush, there are always some who find the gold.  Make sure it is not your company or client whose gold is taken.

Filed Under: Patents

Therasense Makes No Sense–Federal Circuit Grants En Banc Review of Inequitable Conduct

April 27, 2010 By 1 Comment
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The Federal Circuit issued an order granting en banc review of its decision in Therasense v. Becton Dickinson to revisit the standard for proving inequitable conduct.  Inequitable conduct is used by defendants to invalidate a patent.  To prove inequitable conduct, a defendant must prove that the patentee (1)  made an affirmative misrepresentation of a material fact, or (2) failed to disclose material information, or (3) submitted false material information.  In the past, inequitable conduct has generally focused on a failure to disclose pertinent prior art known by the applicant.  However, the recent panel decision by the Federal Circuit in Therasense held that an applicant has a duty to disclose to the USPTO any contradictory attorney argument made in any related application anywhere in the world.

The decision has received much criticism because of the draconian effects of such a rule.  The en banc review will focus on the standard for proving materiality and intent to deceive by the applicant.  One of the questions is whether causation should be required.  In other words, should the test be whether the claim would have issued had the applicant disclosed the inconsistent attorney argument in a related foreign application to the U.S. examiner.  The answer should be obvious unless our goal is to simply reduce the number of valid patents.

In practice, requiring patent attorneys to disclose any contradictory arguments made in any related patent application is unduly burdensome on applicants.  While we certainly do not want to invite applicants to make contradictory arguments, invalidating a patent due to a contradictory attorney argument is a harsh result, particularly if there is no direct evidence of intent to deceive or if the failure to disclose would have made no difference in the examiner’s decision to allow the application.  Thus, the Federal Circuit’s decision in Therasense makes no sense and should be brought in line with the realities of everyday patent prosecution by requiring proof of causation.

Filed Under: Patents

Hall of Famer Jim Brown Fails to Break Through Electronic Arts’ First Amendment Defense

October 4, 2009 By 1 Comment
Note of use of Brett Favre's likeness on front cover

 

Note of use of Brett Favre's likeness on front cover

Judge Florence-Marie Cooper of the Central District of California recently dismissed Jim Brown’s claim of false endorsement against Electronic Arts.  The decision continues the courts’ trend of finding that the First Amendment provides a complete defense to a claim of unfair competition when source identifiers are used within video games.

Jim Brown is a retired professional football players who is revered as one of the best football players of all time.  Electronic Arts (EA) develops and publishes video games, including the popular Madden NFL series.  The Madden NFL game is a virtual football game that contains up to 170 virtual teams and 1,500 virtual players.  The virtual players include players that wear the names and numbers of current real-life players playing on real-life teams.  

EA has an exclusive license from the NFL to use the names and numbers of current players.  The virtual players also include players from historical teams that are anonymous, represented only by number and roster positions.  The players compete in virtual stadiums with virtual fans and virtual coaches, all of which are designed by graphic artists.

Jim Brown alleges in his Complaint that EA used his name, identity, and likeness by including him in two of the historic teams used in the game, namely the 1965 Cleveland Browns team and the All Browns team.  The character in the game that purportedly represents Brown is anonymous and wears the number 37.  Brown wore number 32.  Brown’s statistics and the character’s statistics are “nearly identical.”

Section 43(a) of the Lanham Act provides a federal cause of action for the unauthorized use of a celebrity’s identity (such as visual likeness, vocal imitation, or other uniquely distinguishing characteristic) in a manner which is likely to confuse consumers as to sponsorship or approval of a product.  In the instant case, the Court assumed for purposes of deciding EA’s Motion to Dismiss that the game did use Brown’s likeness.  EA argued that the First Amendment provides a complete defense to Brown’s claim of false endorsement.

In analyzing the First Amendment defense, the courts first determine what type of speech is at issue.  Commercial speech is not entitled to as much protection as non-commercial expressive speech.  However, the courts have found that video games are expressive works that are entitled to as much protection as the most profound literature.  

To evaluate the First Amendment defense, the courts have applied the Rogers balancing test established by the Second Circuit, which provides that a Lanham Act claim against the creator of an expressive work can survive only if “the public interest in avoiding consumer confusion outweighs the public interest in free expression.”  

The Rogers test has two prongs that must be satisfied to find that the First Amendment bars a Lanham Act claim.  First, the use of the trademark (or in this case, the use of the likeness of Jim Brown) must have at least some relevance, however minimal, to the underlying work.  Second, the use of the trademark must not explicitly mislead consumers about the source or content of the work.  Even though there may be a risk that a consumer will wrongly believe that a celebrity endorsed a work, that risk may be outweighed by the public interest in artistic expression.

In Brown, the court found that the Madden NFL series of sports-based games contain numerous creative elements.  Specifically, the game contains virtual stadiums, athletes, coaches, fans, sound effects, music, and commentary created or compiled by the games’ designers.  The court found that these elements represent the designers’ creative interpretation of real-world NFL game play and that the designers’ use of a realistic sports theme “does not change the fact that the Madden NFL games manifest their designers’ creative interpretation of real-world NFL game play.”  The court held that the “Madden NFL video games are expressive works, akin to an expressive painting that depicts celebrity athletes of past and present in a realistic sporting environment.”

Upon finding the video game to be an expressive work, the court went on to apply the Rogers balancing test.  The Madden NFL games are about football. Brown is a legendary NFL football player, the best ever according to some.  Thus, the court found that the use of a legendary NFL football player’s likeness in a game about NFL football is clearly relevant, satisfying the first prong of Rogers.  

In regard to the second prong, the Court found that the use of Brown’s likeness in the game does not explicitly mislead consumers as to the source or content of the work.  Significant to this finding is the fact the Brown’s character is one of thousands of virtual athletes used in the Madden NFL games.  Unlike most of the other characters, Brown’s character is anonymous, identified only by his number and roster position as a running back.  Brown’s character is not depicted on the games’ packaging, advertisements, or promotional materials.  The court held that the mere presence of an anonymous, mis-numbered character in the game does not constitute an explicit attempt to convince consumers that Brown endorsed the game.

Although the court discussed the fact that Brown was not expressly identified in the games either by name or number in reaching its decision, the result should not have been any different even if his name and number had been used  as the Court “assumed” that Brown’s likeness was used in the game.  Thus, it follows that, based on this decision, game developers could use players’ names, numbers, and likeness with impunity in a video game so long as the use of the characters is relevant to the game itself and there is no explicit claim of endorsement by the player.

Such a result would pave the way for development of more professional football games as currently the NFL has granted an exclusive license to EA to use current players in the video games.  EA enjoys a monopoly and would probably like to keep it that way.  However, EA’s successful argument in this case could result in a competitor using the same argument to avoid the need for a license from the NFL, thus taking away some of EA’s market share.  

Can EA have its cake and eat it too?  The Brown decision does not make a player’s likeness free for all purposes.  While the players’ likeness can be used in the video game itself without permission, use of a player’s likeness or name on the packaging for the video game or in promotional materials would probably cross the line and fall outside the protection of the First Amendment because in that case, the name or likeness is used in a manner so as to cause a consumer to believe that the video game is sponsored or endorsed by that player.

In conclusion, the First Amendment may give game developers and publishers more leeway than they think in using the name or likeness of a celebrity without paying for a license. However, it is important that the use of the name or likeness have relevance to the underlying work.  The determination of when a use crosses the line and becomes an explicit attempt to mislead consumers into thinking the product is endorsed by the celebrity will be made on a case by case basis.  Yet, the Brown decision solidifies the principle that mere use of a celebrity’s likeness in and of itself does not prove a Lanham Act violation.

Filed Under: Trademarks, Trade Dress, and Unfair Competition Tagged With: , , , , , , , , , , ,

Leveling the IP Field for Minorities: Why A Game Driven by Creativity is Worth Playing

August 20, 2009 By 1 Comment
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celina-diaz-12-5-07 Note: This article is from a guest contributor, Celina Diaz, an associate at Carstens & Cahoon. Ms. Diaz is a native Texan, born in Corpus Christi after her parents moved from Peru. Ms. Diaz majored in both Chemistry and Spanish Civilizations at the University of Texas at Austin, while taking pre-medical courses. She studied in Spain for a semester before going back to Austin to attend law school at UT. She is an example of an excellent minority patent attorney who overcame the odds to first, obtain a technical degree, and second, to attend a top tier law school. Ms. Diaz is a member of the 2008 Dallas Association of Young Lawyers Leadership Class, Women in IP law, Dallas Hispanic Bar Association, and the Dallas Chapter of Texas Exes.

 

Although minorities have grown to recognize the rewards of the legal profession, intellectual property law continues to be under-represented. Intellectual property (patents, trademarks, copyrights, and trade secrets) plays an important role in an increasingly diverse range of areas, from literature and the arts to genetic engineering. Yet there is a relatively small pool of diverse attorneys in the practice of intellectual property (IP) law.

At least in part, this is due to the technical qualifications (a degree in science or engineering) that one must have in order to sit for the patent bar exam. The small number of minorities with such a background that go into law school contributes to the small pool from which employers can diversify their firms or companies. Further, because of the variety of careers that the practice of law offers, many qualified potential minority candidates may never be exposed to the IP field. Finally, even as the number of minority candidates steadily rises, another obstacle minorities face is the limited number of mentors to which we can relate and vice versa. One of the ways to surmount all of these obstacles is to educate young minorities, law students, and attorneys about the great rewards and opportunities that a career in IP has to offer.

IP is a field dedicated to advancing technologies needed to address the problems and needs of society. Many corporations gain a competitive edge in the market by investing in the protection of IP. Without such protection, a business could lose millions or even billions of dollars in financial opportunities.

A career in IP allows an attorney to combine his or her technical knowledge and/or creative interests with the principles of law. In any one day, an IP attorney may register a copyright for the next best selling novel, counsel a client on the patentability of its most recent innovation, prevent a competitor from using a client’s trademark, and secure a client’s rights to the next big invention. An IP attorney can practice these tasks in any number of settings-whether government agency, law firm, corporation or any institution involved in research and development.

As companies and law firms increasingly conduct e-commerce and global business, the demand for acceptance and understanding of other perspectives, cultures, and languages has also increased. A diverse work environment will become increasingly important to help produce global thinking and solutions as well as foster interpersonal relationships with innovators and agents of other countries.

Severe competition already exists among employers and businesses for qualified minority IP attorneys. In further recognition of the importance of more diverse candidates, there are a number of organizations that encourage minorities to break through the barriers by offering scholarships, mentoring programs, and seminars for those who intend to practice IP law. Many organizations also offer chances for current minority attorneys in IP law to become more visible and hold leadership positions.

In today’s economy, it is essential that minorities seek out and embrace these opportunities. It is also important that we all encourage minorities to consider the economic and cultural impact they can have on the diversity of global innovation and that we all support those organizations and individuals that strive to help those brave (and savvy) enough to pave the way for future generations and businesses.

-Celina Diaz

Filed Under: Business of IP

Corporate Legal Departments Turn to Boutique Law Firms

June 3, 2009 By Leave a Comment
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Budgets for some corporate legal departments have been slashed this year in line with across the board cuts implemented as companies try to weather the downturn in the economy. This leaves corporate counsel with a smaller budget to accomplish the same legal work. In-house counsel at major companies are taking a hard look at outside counsel expenditures to determine if the legal work is being handled efficiently, and many have concluded that a different approach is needed.

One strategy that is becoming more popular is to hire boutique law firms that specialize in particular areas of the law. By wisely selecting the boutique firms, many in-house counsel have found that they can obtain the same, if not better, legal services from specialized boutiques than from large firms.

At the same time, because of the lower overhead expenses of smaller firms, substantially lower legal fees are incurred. According to the American Intellectual Property Law Association’s 2007 Report of the Economic Survey, the average billing rates for intellectual property attorneys at firms of greater than one hundred attorneys was more than 27% higher, on average, than at firms of less than twenty attorneys.

Moreover, the billable hour requirement is typically not emphasized in small firms the same way it is in larger firms. Attorneys in larger firms are under tremendous pressure to bill enough hours to meet billable hour requirements. As a result, this may lead to inefficiencies for the client because the attorney has less incentive to look for the most efficient way to accomplish a task.

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On the other hand, associates in smaller firms may not face this issue. The billable hour requirements are generally much lower and the emphasis is placed more on accomplishing the goals of the client.

Small firms tend to be more flexible than large firms in terms of being able to adapt to the client’s needs without the red tape of getting approval from multiple people. In most cases, if a client requests a change and the lawyer handling that matter is willing to agree to the change, the change can be accomplished immediately.

Personal service typically receives more attention at a smaller firm. The partner handling a matter will generally take a more active role in the work than at a larger firm where the partner managing the file may farm out most, if not all, of the work to paralegals and associates.

Two years ago Mike Dillon, the General Counsel of Sun Microsystems, predicted that the current law firm model of deriving profitability from growing the scale of the firm and raising hourly rates would soon be over. Indeed it appears that his prediction is coming true as a number of large law firms are faced with layoffs of associates and even partners in some cases.

Large firms do provide advantages and benefits that are not available at boutique firms. Probably the most significant advantage is having a large network of attorneys in different locations. This enables the firm to be used as a “one stop shop.” However, in-house counsel should consider whether the advantages of using a large firm are worth the price paid. In many cases, in-house counsel could save money for the company by doing some shopping and selecting a qualified boutique law firm.

Moreover, many smaller firms are subject to less turnover and are more stable than larger firms. This is particularly evident in today’s economy as larger law firms cut back on their personnel. Smaller firms are often more resilient, have less debt, and are able to adapt more readily to clients’ needs than larger firms.

Increasingly, corporate legal departments are turning to smaller firms. While smaller firms may not be the best choice in all circumstances, they certainly deserve a look to determine whether the use of boutique law firms makes economic sense.

Filed Under: Business of IP

Promises Not to Challenge the Validity of a Patent after MedImmune: Are they Enforceable?

May 9, 2009 By Leave a Comment
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In MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764 (2007), the Supreme Court held that a licensee had standing to challenge the validity of the licensed patent, despite the licensee’s failure to breach the agreement by refusing to pay royalties.  In the wake of this opinion, there was much debate about the effect that it would have in future cases.  For example, many observers predicted that there would be a wave of licensees rushing to the courthouse to file declaratory judgment actions to challenge the validity of the underlying patents, while incurring no risks because they continued to comply with their contractual obligations.  Patent licensors expressed concern over the possibility that licensees would now seek to “have their cake and eat it, too.”

Contrary to the speculation immediately after MedImmune was decided, there has been no wave of DJ actions filed by licensees trying to challenge patent validity while continuing to pay royalties.  In fact, there appear to have been very few actions filed by licensees at all.

The primary reason for this lack of activity is likely that patent litigation remains expensive, and licensees and licensors alike prefer to avoid the expense and uncertainty inherent in patent litigation if possible.  While MedImmune made it clear that a licensee need not repudiate the license agreement prior to challenging the validity of a patent in a declaratory judgment action, the Court did not eliminate any of the confusion surrounding the status of the doctrine of licensee estoppel.

Consequently, while there is no question that a licensee can now sue without repudiating the agreement, questions regarding whether certain contractual provisions designed to deter a licensee from challenging the validity of a patent are enforceable remain open.  Provisions such as increased royalty rates or the option of termination by the licensor in the event of a challenge by the licensee or other punitive measures may deter licensees from even considering filing suit in the first place.  Moreover, even if a licensee believed that these provisions in the contract would not be enforced, there still remains the question whether the licensee will prevail on an invalidity challenge, one that does not have an obvious answer in the vast majority of cases.  In cases where the licensee is convinced that there is a high likelihood of invalidating the patent, it may be more likely that the licensee would choose to stop paying royalties.

To understand what the state of the law is and whether punitive provisions for challenging the validity of a patent  would be enforced, the MedImmune decision should be considered in light of Lear v. Adkins and its progeny.  The holding of MedImmune was limited to the determination of whether a justiciable controversy exists in a declaratory judgment action by a licensee that had not repudiated the license agreement.  See MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 135-36 (2007).

Although the Court could have addressed the confusion spawned by its 1969 Lear v. Adkins decision, it did not, instead choosing to focus on whether the district court had declaratory judgment jurisdiction:   “We express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity–that is, on the applicability of licensee estoppel under these circumstances.”  Id. at 124.

Prior to the Supreme Court’s decision in Lear, the doctrine of licensee estoppel prevented a licensee from challenging the validity of the licensed patent.  Lear v. Adkins, 395 U.S. 653, 656 (1969).  The rationale behind the doctrine is that a licensee should not be permitted to enjoy the benefits of the license agreement only to argue later that the patent that forms the basis of the agreement is void.  Id.

In Lear, the Court held that a licensee who had repudiated the license agreement should not be precluded from challenging the validity of the licensed patent.  Id. at 670-71.  The Court recognized that while it is important that parties be bound by their contracts, the public interest in eliminating invalid patents is paramount.  Id. According to the Court, challenges to invalid patents would be best accomplished by “the only individuals with enough economic incentive” to do so, and therefore, ruled that provisions prohibiting the licensee from challenging the validity of the patent or requiring the licensee to pay royalties during a challenge are unenforceable.  Id. at 670-74.

While Lear has been characterized as the death of licensee estoppel, see, e.g., Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1223 (Fed. Cir. 1988), the effect of the decision has been limited in subsequent decisions by lower courts to prevent the inequities that would arise in the event of an unqualified rule allowing the owner of a patent to prevent a challenge to the validity of the patent in every case.  For example, the Federal Circuit has held that the policy of Lear does not apply in the case of an assignment of a patent.  Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 150 F.3d 1374, 1377 (Fed. Cir. 1998); Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1224 (Fed. Cir 1988).

Similarly, the policy of providing finality to litigation settlements and consent decrees has won out over the policy of eliminating invalid patents.  See, e.g., Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1368 (Fed. Cir. 2001); Diversey Lever, Inc. v. Ecolab, Inc., 191 F.3d 1350, 1352 (Fed. Cir. 1999); Hemstreet v. Spiegel, Inc., 851 F.2d 348, 350 (Fed. Cir. 1988); Foster v. Hallco Mfg. Co., 947 F.2d 469, 483 (Fed. Cir. 1991).

The Federal Circuit has also looked in disfavor on the argument that under Lear a licensee does not owe royalties under the license agreement prior to the date the validity of the patent is challenged even though the patent is declared invalid.  In Shell Oil, the licensee continued to account for royalties under the agreement except with regard to one process of which it never informed the licensor; the court distinguished Lear because the licensee in Lear had stopped the payment of royalties prior to its challenge of the licensed patent and had given notice of the challenge of invalidity.  Studiengesellschaft Kohle m.b.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997).  Quoting its Diamond Scientific decision, the court noted that the policy of Lear should be balanced with the equities of the contractual relationship between the parties:

To allow the assignor to make that representation [of the worth of the patent] at the time of the assignment (to his advantage) and later to repudiate it (again to his advantage) could work an injustice against the assignee…. Despite the public policy encouraging people to challenge potentially invalid patents, there are still circumstances in which the equities of the contractual relationships between the parties should deprive one party … of the right to bring that challenge.

Id. at 1567.  Interestingly, in discussing the policy behind the Court’s decision in Lear, the Federal Circuit noted the fears of the Supreme Court were expressed “[i]n tones that echo from a past era of skepticism over intellectual property principles.”  Id. Some would say the same skepticism is apparent in today’s Supreme Court.

In Shell Oil, the Federal Circuit refused to apply Lear because there was no frustration of federal patent policy in enforcing a license agreement to allow the licensor to recover royalties until the date the licensee first challenged the validity of the patent.  Id. The licensee received the benefits of using a licensed process while being insulated from competition, insulated from investigations of infringement, and even insulated from paying royalties until the discovery of the process at issue by the licensor.  Id. The court reasoned that the licensee should be required to pay the back royalties to prevent the injustice of allowing the licensee to exploit the protection of contract and patent rights for a number of years only to later abandon its obligations under those rights.  Id. Thus, a licensee that has not stopped paying royalties has not repudiated the license agreement and is therefore not entitled to invoke the protection of Lear.  Id. Consequently, to invoke Lear, a licensee must (1) stop paying royalties under the license agreement and (2) give notice to the licensor of the challenge to the invalidity of the patent.  Id.

Although the Federal Circuit requires a licensee to stop paying royalties under a license agreement before the protection of Lear can be invoked, this rule no longer prevents a licensee from filing a declaratory judgment action to challenge the validity of a patent under the Supreme Court’s decision in MedImmune.  It only prevents the licensee from later claiming that royalties are not due or that royalties must be paid back if in fact the licensee continues to pay royalties while challenging the patent.  Prior to MedImmune, the Federal Circuit had effectively precluded a licensee from challenging the validity of a patent while taking advantage of the protections of the license agreement by holding that there is no case or controversy until the licensee stops paying royalties under the license agreement.  See, e.g., Gen-probe, Inc. v. Vysis, Inc., 359 F.3d 1376, 1381-82 (Fed. Cir. 2004)(holding no Article III standing absent breach).

The question then is whether policy considerations dictate that a promise by the licensee not to challenge the validity of the patent should be enforced when the licensee continues to pay royalties under the agreement while challenging the validity of the patent.  A blanket rule allowing the enforcement of a licensee’s agreement not to challenge the validity of the licensed would be contrary to the public policy of encouraging licensees to challenge invalid patents.  However, failure to enforce such a provision in situations where the licensee has not repudiated the license agreement would allow a licensee to challenge the validity of the patent with impunity while still reaping the benefits of the license during the challenge and after the challenge if unsuccessful.  Enforcement of an agreement not to challenge the validity of the patent should not be an absolute bar to challenging the validity of the patent.  The appropriate policy balance is to allow enforcement of such provisions where the licensee has not repudiated the license agreement.

It should be noted, as discussed above, that the rush to the courthouse by licensees that some predicted after MedImmune has not occurred.  In fact, I have been unable to find a single case after MedImmune of a licensee challenging the validity of a licensed patent while continuing to pay royalties under the license agreement.

The Court’s decision in MedImmune did nothing to ameliorate the uncertainty that exists as a result of Lear and progeny.  Because of the uncertainty that exists in the law at present, licensors and licensees alike cannot be sure whether provisions that seek to prevent a licensee from challenging the validity of a licensed patent will be enforced.  Uncertainty leads to greater costs for both sides, particularly where litigation ensues.  Enforcing a covenant not to challenge the validity of a licensed patent where the licensee has not repudiated the license agreement should be permitted and would not frustrate the policies behind federal patent law.

Indeed, under such a rule, a licensee could still challenge the validity of a patent by discontinuing royalty payments and giving notice to the licensor of the challenge.  The rule would also provide more certainty in the law in that a licensor can be assured that a licensee will not be allowed to take a license only to later challenge the validity of the patent while taking advantage of the benefits of the license agreement.  This will lead to lower costs for the licensee ultimately because presently the licensor must build into the price of the license the possibility that the licensee might challenge the validity of the patent. This is typically accomplished by either requiring a larger up-front royalty payment or a higher ongoing royalty rate.

Moreover, preventing a licensee from challenging the license agreement with impunity will result in challenges to the patent only where the licensee has a good faith basis for doing so.  Most importantly, enforcing agreements not to challenge the validity of the patents where the licensee fails to repudiate the agreement will increase certainty in the negotiation and enforcement of license agreements, something that was requested by the Licensing Executives Society in an amicus brief “In Support of Neither Party” in the appeal of MedImmune to the Supreme Court.  The brief of the Licensing Executives Society requested that the Court ask the Supreme Court for guidance on behalf of licensors and licensees alike and noted:

Licensees and licensors now often do not know prior to entering into a license agreement whether, when, or how licensees will be permitted to challenge patent validity. Similarly, licensees and licensors often do not know to what extent licensors can prevent, hinder, or ameliorate the impact of such validity challenges.

Brief of Licensing Executives Society (U.S.A. & Canada), Inc. as Amici Curiae Supporting Neither Party at 2, MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).  Unfortunately, the Supreme Court did not clarify any of the confusion spawned by Lear and progeny.

Filed Under: Patents
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