Lee v. Tam – Disparaging Mark or Free Speech? – Pending Decision

By Michael Small

 

Section 2(a) of the Lanham Trademark Act, 15 U.S.C. §1052(a) allows the United States Patent and Trademark Office (USPTO) to refuse registration of marks that contain immoral or scandalous matter.[1]  Known as the disparagement clause, the USPTO enforces the rule in the Trademark Manual of Examining Procedure (TMEP) Section 1203.01, specifying the types of rejected marks that fall under immoral or scandalous nature, such as obscene graphics or disparaging terms.[2]  Examples of rejected trademark applications include the following: Stop the Islamisation of America; Democrats Shouldn’t Breed; Naturally Intelligent God Gifted Africans; and most recently, the cancellation of the Washington Redskins NFL football team’s trademark name in 2014.  Rejected trademarks are void from government benefits, such as preventing registration from other confusingly similar marks during the application process, receiving sole ownership of the mark for advertising purposes, and prevent foreign companies with similar marks to import their trademarked goods.  In the pending U.S. Supreme Court case Lee v. Tam, the justices will make a decision that determines whether Section 2(a) of the Trademark Act violates the First Amendment.[3]  If the justices confirm that Section 2(a) violates the First Amendment, it would mark one of the most significant changes to the Lanham Act since the amendment of the Trademark Counterfeiting Act of 1984.[4]

Background

Before the case began, Tam created an all-Asian American band in 2006, named “The Slants.”  According to Tam, the name addressed issues with racism that Asian Americans face and share the band members’ experiences with the term, ultimately reclaiming the word for Asians.[5] Tam attempted to register the band name with the USPTO in 2011; however, an USPTO examiner rejected the application, arguing that the name is derogatory of Asians and those of Asian descent, despite the band’s intent.  Tam appealed to the USPTO’s Trademark Trial and Appeal Board, but the Board affirmed the examiner’s position.  Tam filed an appeal to the United States Court of Appeals for the Federal Circuit, arguing that the USPTO’s rejection of his mark is unconstitutional in accordance to the First Amendment.  Although the Federal Court initially affirmed the USPTO’s decision, Tam filed a petition for a rehearing en banc.  The en banc panel found that the government erred in treating the case with strict scrutiny because the government did not take into consideration Tam’s accusation of First Amendment violation.  The en banc panel reversed the USPTO’s rejection of the trademark, arguing that the USPTO examiner’s rejection under Section 2(a) despite the band’s ideology is viewpoint discrimination and therefore violates the First Amendment.  The panel further clarifies that the First Amendment protects even hurtful speech.  The director of the USPTO, Lee, filed a writ of certiorari to the Supreme Court.  The Supreme Court accepted the writ and heard oral arguments of the case in January 2017.  A final decision from the Supreme Court is pending.

 

Analysis

The Supreme Court’s decision on this case will have a huge impact on U.S. Trademark Law should the Court rule in favor of Tam.  If the Court agrees that Section 2(a) of the Trademark Act is unconstitutional, it would mean the readjustment of the Lanham Act to accommodate trademark registration that contained restrictions on immoral or scandalous materials.  Trademark registrants would have to depend on other regulations to take down purposeful slanders of their marks, such as dilution or likelihood of confusion.  Consumers would also be at risk of exposure to trademarks that may offend them, which could discourage their investment into U.S. markets.  For instance, consumers and entrepreneurs of black descent in the U.S. would not be open to purchasing goods whose mark consists of material that may offend them, such as marks that refer to hate groups or openly mocks their descendent.  The approval of Tam’s mark, despite the owner’s intent, may bring about a challenge as to how the consumers will react to future disparaging marks.

There is a previous Supreme Court case that dealt with a similar situation as Lee v. Tam.  In 2015, the Court reviewed Walker v. Texas Division, Sons of Confederate Veterans, Inc., in which the state of Texas rejected the Sons of Confederate Veteran’s confederate flag design for license plates.  The Board’s reasoning for this rejection centered around the public’s view, who may find the confederate flag offensive due to its association with organizations that express hatred directed towards specific people and/or groups.[6]  In this case, the Supreme Court ruled that license plates are government speech because of their maintenance and distribution by the state of Texas.  Therefore, license plates are exempt from the First Amendment defense, even from the expression of private individuals.  As the USPTO also mandates the marks that will receive protection, it is likely that the Supreme Court could also decree trademarks government speech and rule in favor of Lee.  However, the ruling in Walker had a 5-4 decision amongst the justices, making the ruling a narrow victory for government speech.  It is evident that there is a divide between justices in determining the eligibility of protection under government speech or the First Amendment.

Conclusion

Based on evidence from previous Supreme Court decisions and the treatment of government speech and the First Amendment, one can conclude that the court’s ruling on this case will have an impact on how the legal system views trademark law.  If Tam acquires the court’s favor and receives registration of his mark, it would open the opportunity for other groups to register marks for similar purposes as Tam.  However, the intent to use said marks will vary for each group, bringing about a concern of whether future registered marks will be used in good or bad faith.  If the court rules in favor of Lee, then trademarks could be identified as government speech.  Therefore, it may be recommended for future owners of rejected trademarks not to rely exclusively on the First Amendment to defend their trademark.  Debate might also arise as to whether other aspects of government-protected intellectual property rights are government speech, such as trade dress or patents.  This would bring about confusion in IP law as to whether the acquisition of government protection is enough to warrant government speech.  One can hope that regardless of the Supreme Court’s decision, the outcome will further clarify what terms are eligible for protection under the First Amendment or government speech for trademark registration.

 

[1] See 15 U.S.C. §1052(a)

[2] E.g. Greyhound Corp. v. Both Worlds Inc., 6 U.S.P.Q.2d 1635, 1639 (T.T.A.B. 1988) (holding that a mark of a defecating dog as a logo for polo shirts and t-shirts was scandalous, and thus barring the mark from registration under Section 2(a)).

[3] Lee v. Tam, No. 15-1293, 2016 U.S. LEXIS 4462 (U.S. Sept. 29, 2016) (granting certiorari).

[4] The Trademark Counterfeiting Act of 1984 enforces a penalty for the unauthorized or intentional usage of counterfeit trademark, with the maximum sentence of five years imprisonment or a $250,000 – $1 million fine.  See 18 U.S. Code § 2320.

[5] See Katy Steinmetz, “The Slants” Suit: Asian-American Band Goes to Court Over Name,” Time, Oct. 23, 2013, http://entertainment.time.com/2013/10/23/the-slants-suit-asian-american-band-goes-to-court-over-name/ (“Prior to the term Asian becoming in vogue, the term that the Asian-American community used [to describe themselves] was “yellow.” It’s empowering when people use it and embrace it as part of their identity.”).

[6] See Walker v. Tex. Div., Sons of Confederate Veterans, Inc., 135 S. Ct. 2239 (2015).

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Star Athletica v. Varsity Brands – Supreme Court Ruling’s Impact

By Michael Small

 

In a recent Supreme Court case regarding the compatibility between clothes and copyright, Star Athletica v. Varsity Brands, the justices ruled in favor of Varsity Brands in a 6-2 decision, holding that the Defendant’s cheerleading uniform designs are protectable under copyright because they were deemed conceptually separable[1] from the uniform.  This decision answered the question brought to them by Star Athletica’s petition,[2] to which they state the following regarding the compatibility of copyright on clothes using the conceptual separability test:

A feature incorporated into the design of a useful article is eligible for copyright protection only if the feature (1) can be perceived as a two- or three-dimensional work of art separate from the useful article, and (2) would qualify as a protectable pictorial, graphic, or sculptural work—either on its own or fixed in some other tangible medium of expression—if it were imagined separately from the useful article into which it is incorporated.[3]

When placed into the context of the cheerleading uniforms, the justices noted that the surface decoration of the cheerleading uniforms are separable and when alone, allows them to appear as a pictorial, graphic, or sculptural work.  When the separated decorations are applied to any other medium, they would be considered a two-dimensional work of art.  Therefore, Varsity’s designs on their cheerleader uniform are protectable under copyright.

The initial case began in 2015 when Varsity Brands sued Star Athletica under copyright infringement of their cheerleader uniform designs, which are registered in the Copyright Office from the drawings and photographs taken of the outfits.  The district court ruled in favor of Star Athletica, agreeing with their argument that copyright could not be applied to the utilitarian nature of the uniform, regardless of how unique the patterns are on the uniform.  Varsity Brands successfully filed for appeal in the Sixth Circuit and the lower court’s decision was reversed.  The Sixth Circuit ruled in favor of Varsity Brands, holding that the design patterns are copyrightable as the photography made the designs into “pictorial, graphic, or sculptural works,”[4] which is protectable under the Copyright Act.  Star filed for a writ of certiorari in 2016, arguing that the Sixth Circuit’s decision “allows roundabout copyrighting of garment designs masquerading as separable decorative features, preventing competition and inviting new copyright claims for all manner of garments … based solely on the arrangement of stripes and color blocks.”[5]  Ultimately Star Athletica’s argument aimed to dismiss Varsity Brand’s copyright hold on their outfits.  The writ was approved and the case ascended to the U.S. Supreme Court.  The final decision was made in March 2017, in which the U.S. Supreme Court ruled in favor of Varsity Brands, thus concluding the issue.

Prior to the U.S. Supreme Court’s ruling, clothing design is not protectable by copyright law because clothes serve a utilitarian purpose and are identified as useful articles;[6] they keep the customer warm, covered, and protected from the elements.  The functionality of clothing outweighed the creative intent of any design added to the garment, and are therefore not applicable for copyright.  This is the same reason why most clothes cannot be protected by utility patents, although design patents and trademarks may apply on a case-by-case basis (e.g., purses and shoes, large logo T-shirts).  This lack of intellectual property (IP) protection meant that new, creative designs for clothes released in businesses such as the fashion industry, are prone to receiving knockoff versions being sold afterwards, often flooding the market with multiple copies of similar, but lower quality goods.  These knockoffs enter the market after or even before the original design is ready for sale, stealing profits from the original designer.

The U.S. Supreme Court’s ruling on this case will likely have a major impact on the fashion industry.  Fashion designers have been given a tool supported by the U.S. Supreme Court that can be used to argue that the conceptual nature of a design in their product can be protected under copyright by using the conceptual separability test.  This logic can give fashion designers an incentive to clamp down on the copycat/knockoff industry that manifested in the fashion industry due to being a copyright-free environment.  This would make it more difficult for copycat/knockoff designers to make and sell products in a market where copyright is enforced, thus returning profits to the original designers.  Although there is no bill that guarantees protection of clothing design, the conceptual separability test approved by the U.S. Supreme Court could be used to help grant designers the copyright protection they want for their works.  If the design concept can be separated from the clothing design and appear as a two-dimensional work, a copyright can be applied to a clothing design.

While the ruling may provide copyright benefits for the fashion industry, not all are in support of the potential impact.  Up until this ruling, the fashion industry maintained itself somewhat efficiently without the protection required from copyright.  In fact, there are arguments that support the lack thereof for copyright, stating that such an implementation would damage innovation for designers.  Previous attempts to make fashion design copyrightable through legislative bills such as the Innovative Design Protection Act (2012) and the Design Piracy Prohibition Act (2007) have been met with opposition from independent fashion designers and businesses alike, making them fail to pass in Congress.  Some argue that it would be impossible to make an original design from scratch because designers learn and become influenced from other creations.  Therefore, copying is essential in fashion design to promote innovation and new takes on fashion under Raustiala and Sprigman’s Piracy Paradox argument.[7]  Others are more concerned that designers would focus more on the risk of copyright litigation rather than making interesting designs, reducing innovation and creativity in the fashion design industry.  In addition, legal costs for fashion designers can rise should they consult with a lawyer regarding fashion design and copyright, which could indirectly lead to a rise in prices of clothes and designs for the consumer overall.  Finally, enforcement of copyright protection may not be a viable option due to the fast-paced nature of fashion design, where the ‘next big thing’ is only from months to less than a year away, as opposed to the length and complexity of filing a copyright litigation and going to court.  With an industry that has adapted to having limited IP protection since the Copyright Act’s implementation, arguments against copyright in the fashion industry center around the problem that its incorporation could severely damage the industry’s economic and creative value now and in the future.

Despite the opposition against implementing copyright into the fashion industry, the U.S. government has shown interest in the past to make such an introduction.  It could be argued that the Star Athletica v. Varsity Brands U.S. Supreme Court ruling is a representation of this interest, giving designers a tool to use should they feel that their design is being infringed.  The effort to include fashion design for copyright protection would also strengthen the U.S.’s global market to attract foreign direct investment, as several countries in Europe have their own copyright laws for fashion design, such as France and Germany.  This is further reinforced by the presence of the European Union (EU), which grants 25 years of design copyright protection for all its 28 member states.  The protection granted by the EU makes it viable for fashion design companies concerned about copycat/knockoff designs to doing business overseas in the EU’s member states than in the U.S.  The outcome of Star Athletica v. Varsity Brands could garner interest from politicians and businesses to try and compile another bill to include fashion as copyrightable, allowing the U.S. to garner interest in some fashion designers that were wary of the previous copyright-free area of clothing design.  At the same time, however, companies that relied on the copyright free environment for designing outfits, such as certain sports teams or other artists, would have to put resources into redesigning the product so that their goods do not infringe on the original copyright.  An introduction of a bill that would enforce an immediate change without a smooth transition could have a drastic effect on the fashion design industry, for better or worse.  The impact of the Star Athletica v. Varsity Brands ruling has yet to be fully measured as the decision was just made and there are not many cases that have tested the U.S. Supreme Court’s conceptual separability test.   It is very likely that a rise of copyright litigations will occur that will test the extent of the copyright protection granted to clothes by the conceptual separability test from both individual fashion designers and businesses.  Once its protection range has been analyzed, it will become easier to analyze the aftermath of the Star Athletica v. Varsity Brands ruling.

[1] “In its statutory form, the separability inquiry asks whether the aesthetic features of a useful article can be identified separately from, and can exist independently.”  See Barton Keyes, Alive and Well: The (Still) Ongoing Debate Surrounding Conceptual Separability in American Copyright Law, Ohio State Law Journal, 69 (109), (2012), http://moritzlaw.osu.edu/students/groups/oslj/files/2012/04/69.1.keyes_.pdf.

[2] “What is the appropriate test to determine when a feature of the design of a useful article is protectable under § 101 of the Copyright Act?”  See Star Athletica, L.L.C., v. Varsity Brands, Inc., Varsity Spirit Corporation, and Varsity Spirit Fashions & Supplies, Inc., On Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit, (2016).

[3] See Star Athletica, L.L.C. v. Varsity Brands, Inc., et al., 580 (U. S. Supreme Court, 2017), https://www.supremecourt.gov/opinions/16pdf/15-866_0971.pdf.

[4] See Varsity Brands, Inc. v. Star Athletica, LLC, 799 F.3d 468, 471 (6th Cir. 2015).

[5] See Petition for a Writ of Certiorari at 31, Star Athletica, LLC v. Varsity Brands, Inc. (Jan. 5, 2016) (No. 15-866), http://www.scotusblog.com/wp-content/uploads/2016/05/SACP.pdf.

[6] “A ‘useful article’ is an article having an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information. An article that is normally a part of a useful article is considered a ‘useful article’.”  See 17 U.S.C. § 101.

[7] The Piracy Paradox argument revolves around the idea that the nonstop changing trends of fashion in the fashion industry is made aware of by the consumer, such as not wearing what everyone else is wearing, or the constant demand for new products even after acquiring new products.  This awareness makes copying a viable option that helps drive faster innovation in design, sales, and competition more than enforcing copyright or other forms of IP protection. See Kal Raustiala and Christopher Sprigman, The Piracy Paradox: Innovation and Intellectual Property in Fashion Design., Virginia Law Review, 92, (Nov. 13 2006), p. 1687-1777.

Fair Use Doctrine

By Michael Small

 

The Copyright Office defines Copyright as the exclusive right for a person (mainly the author) to reproduce, publish, sell, or claim ownership of his or her original works of creation under Section 106 of the Copyright Act of 1976.[1]  The copyright symbol (©) identifies the work as protected to the copyright owner and the audience.  This intellectual property right grants protection to the author’s creative works such as literature, music, drama, arts, or architecture upon the creation of his or her product in a fixed media.  This protection remains valid until the owner’s death plus 70 years.  Afterwards, the work becomes public domain, which allows for anyone to use the work for any purpose.  However, to prevent potential conflict with the First Amendment’s grant of freedom of speech, religion, and the press, the court created the fair use doctrine as a check and balance to copyright’s power.

The Fair Use Doctrine is a declaration that allows the usage of copyrighted works without permission from the author under certain conditions.  If the court determines fair use, then a court will void a copyright infringement and dismiss the case.  The fair use doctrine applies mainly to transformative works, which either comment upon, criticize or make a parody out of the existing work.  It also provides protection for limited usage of copyrighted works, such as using the material with intent for educating, broadcasting in news, or for researching purposes. The court weighs four factors in a fair use determination/assessment:

  1. The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
  2. The nature of the copyrighted work;
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
  4. The effect of the use upon the potential market for or value of the copyrighted work.[2]

 

Another set of guidelines monitor the usage of copyright material in education.[3]  For fair use to apply in an educational setting, the usage must take place in a classroom setting or similar area of instruction, occur face-to-face with the instructor in person, and take place in a non-profit educational institute.  Therefore, the fair use defense protects copyrighted works displayed or performed in a classroom setting.  However, it is prohibited to distribute copyrighted work unless the first sale took place between the teacher and publisher/owner of the copyrighted good.[4]

Purpose and character of the use

The intent to use a copyrighted work by anyone other than the owner is the first determinant.  This factor takes into consideration several aspects: whether the user of the work intended to receive a profit; if it was distributed for free or sold in commerce; if it was derived/transformed by changing the meaning of the original work; or if value was changed by adding in different information, aesthetics, and point of view.  The more a work comments/critiques or radically transforms and differentiates itself from the original work, the more viable the fair use defense.  For example, in Campbell v. Acuff-Rose Music, Inc., Campbell sued the 2 Live Crew over unauthorized usage of Roy Orbison’s “Oh, Pretty Woman,” in the defendant’s song, “Pretty Woman.”  Although the Defendant frequently used the ‘heart’ of the song “pretty woman,” the court ruled in favor of Acuff-Rose Music Inc.[5]  The court classified the Defendant’s song as a parody of “Oh, Pretty Woman.”  Specifically, the court found that 2 Live Crew took a more comical, raunchier approach to the song, changing lyrics beyond the first few lines, and mocking the original version in its context.  Therefore, the court found the work protectable under the fair use defense as a parody, despite its commercial nature.

Nature of the copyrighted work

The court also considers the type of information that the individual copies for fair use.  In this context, a court will likely find that information that is factual in nature, such as biographies, scientific information, and research is less likely to be infringing compared to more creative, original works like art, music, and entertainment.  In addition, whether the author publicized the work or not is also added in as a weighing factor, with the usage of unpublished work being a higher risk of copyright infringement due to the author’s right for first to publicize.[6]

Amount and sustainability of work taken

The amount of the copyrighted work that one takes from the creator also plays a factor in determining fair use.  Small portions of a work, such as a quote or a few seconds of a video, are generally considered fair use, unless argued otherwise.  The larger the proportions of the taken work, the more likely a court will find that someone infringed a work.  The type of media (music, painting, etc.) in which infringement took place all have different limits of toleration for used content, most of which can be argued for or against proof of infringement, depending on the case.  If the portion of a taken work is minimal in comparison to the overall work, a copyright case could be dismissed as de minimis.  For example, a developer copying 30 characters from a work that contains 70 pages worth of code would be de minimis.  However, if the portion used is from the ‘heart’ of the work, such as a major passage in the book or the chorus of music, it will be more likely that the material is infringing a copyright, regardless of the quantity taken.

Impact on the market for the owner

Similar to a trademark, judging how much of an impact a good produced outside of the owner’s jurisdiction may have an effect on the market the owner does business in.  This is the last major factor that contributes to judging whether infringement took place.  If the reproduced good is sold outside of the owner’s knowledge for profit, it is very likely that infringement took place because the owner is deprived of the profit earned from the sale outside his jurisdiction.  This infringement remains consistent even if the copyright owner had not considered making the good in a different media and market of the original work.[7]  For example, a painting based off a photograph may be at risk for infringing the photographer’s rights because the photograph’s existence revealed a potential market for future painters.

Other factors

A judge or jury’s opinion will vary from case to case because the determination for copyright infringement is based off subjective analysis of the four factors.   The most common factor for this judgement is whether the infringer takes the copyrighted material in good or bad faith.  Courts consider whether the individual takes a work with the knowledge that someone else created it or uses a work when the copyright holder directly denied the individual permission to use the work.  In the above scenarios, the court would likely find infringement in bad faith.

In contrast, when an individual acknowledges the source material (citations, references, etc.) or provides a visible disclaimer to the ownership of the copyrighted work that he/she uses, a court will likely find infringement in good faith, which may positively impact the jury’s determination of fair use.  However, the judgment between the value of faith is subject to change depending on the context of the lawsuit and the morality of the judge and jury.

Fair use outside of copyright

Fair use is not exclusive to copyright.  In commerce, a company can use another trademark without permission from the owner under the Lanham Act.  The Lanham Act outlines the following conditions for fair use:

  1. Any fair use, including a nominative[8] or descriptive fair use, or facilitation of such fair use, of a famous mark by another person other than as a designation of source for the person’s own goods or services, including use in connection with—
    1. advertising or promotion that permits consumers to compare goods or services; or
    2. identifying and parodying, criticizing, or commenting upon the famous mark owner or the goods or services of the famous mark owner.
  2. All forms of news reporting and news commentary.
  3. Any noncommercial use of a mark.[9]

 

Therefore, a company using another company’s mark is fair use if the infringer uses the taken mark for comparative advertising with their own mark, commentary, news reporting, or parody, similar to the fair use doctrine in copyright.

For patents, a limited fair use is applicable only for pharmaceutical patents under the Hatch-Waxman exemption.[10]  Originally known as the Drug Price Competition and Patent Term Restoration Act of 1984, this Act proclaims that there is no infringement for patents that are government regulated generic drugs.  The court ruling of Merck KGaA v. Integra Lifesciences I, Ltd[11] further extends this protection to preclinical studies such as pharmaceutical research and experimentation using said drugs.  A court will likely find that usage of pharmaceutical patents in these conditions by inventors or companies are fair use and thus exempt from patent litigation.

Degradation of fair use concern

There is concern that the term and usage of fair use is misrepresented from its original use as free speech to an excuse for infringement, especially in the court system.  For example, in Cariou v. Prince,[12] the district court found that the defendant’s artwork infringed on the plaintiff’s copyright because the work did not comment upon the Plaintiff’s book of photographs,[13] causing a major backlash in the art community regarding transformed works.  The major concern found in the backlash focused on arguing what degree an artist’s work would have to be modified to comment upon the original copyrighted material.  The Second Circuit eventually repealed the decision, holding in favor of Prince because the initial reading neglected measuring the transformative degree the defendant’s work went through in comparison to the plaintiff’s photographs.[14]  Despite the reversal of the initial court’s decision, it did not change the fact that the district court ignored the transformative nature of Prince’s work when considering the fair use defense, exposing evidence of the fair use defense’s degradation in the court system.

Conclusion

            Copyright’s main purpose is to promote the progress of science and useful arts through granting owners exclusive control of their works.[15]  The fair use doctrine offers a challenge to copyright’s intent by questioning whether the promotion is best served by allowing the use of copyrighted material rather than preventing it.  The public views both sides with a negative reception.  Some argue that copyright gives too much control to copyright owners, with its creators restricting the usage of their work to avoid criticism or negative reception affecting their productivity.  Others argue that fair use is nothing more than an excuse for infringement, allowing anyone to take credit from the work of others will little to no drawback.  Despite the negative public view on both intellectual property rights, both views share the same purpose of benefitting the public and promoting the arts and sciences.  The dispute between copyright and the fair use doctrine is a reoccurring conflict of check and balances between protection of property and freedom of expression.  By debating these intellectual property rights in the courts, there is both innovation and further amendments to the legal system regarding copyright and fair use, along with an introduction to new creative works that challenge their validity.  Therefore, regardless of the outcome, the fair use defense is key to allow both businesses and the public to benefit from the use of a copyrighted work.

[1] See U.S. Copyright Office, Circular 1, Copyright Basics, 1 (May 2012).

[2] 17 U.S.C. § 107.

[3] See 17 U.S.C. § 110.

[4] Once a copyrighted good is sold to a consumer, the consumer is free to sell, display, perform, or dispose of the copy without the copyright owner’s permission.  See 17 U.S.C. § 109.

[5] See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994).

[6] See Deborah R. Gerhardt and Diane K. Kjervik, Protect Your Right to Write Again: Tips for Assuring that Your Publication Agreement is a Comfortable Fit, 12 J. Nursing L., 124, 124 (2008).

[7] See Rogers v. Koons, 960 F.2d 301 (2d Cir. 1992) (holding that defendant’s sculpture, which was based on plaintiff’s photograph, infringed the plaintiff’s rights, as the photograph’s existence marked a potential market for sculptures, despite the plaintiff’s use of photography).

[8] Nominative fair use is identified as the following: The use must accurately refer to the owner of the trademark or the goods or services sold under the trademark; The use must not imply any endorsement or sponsorship by the trademark owner; There should be no easier way to refer to the owner or its products; and Only so much of the trademark can be used as is needed to identify the trademark owner and no more.  See Chad J. Doellinger, Nominative Fair Use: Jardine and the Demise of a Doctrine, 1 Nw. J. Tech. & Intell. Prop. 66 (2003).

[9] See 15 U.S.C. § 1125.

[10] See 35 U.S.C. § 271 (e)(1) (“It shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention … solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products.”).

[11] See Merck KGaA v. Integra Lifesciences I, Ltd., 125 S. Ct. 2372 (2005) (noting that Section 271(e)(1) does not exclude experimentation on drugs under FDA submission or use of patented compounds for experimenting on drugs).

[12] See Cariou v. Prince, 714 F.3d 694 (2d Cir. 2013).

[13] See Cariou v. Prince, 714 F.3d at 704 (discussing the decision of the lower court).

[14] Id. at 707-08.

[15] U.S. Const. art. 1, § 8, cl. 8.

THE DEFEND TRADE SECRETS ACT

by

Michael Small

The Defend Trade Secrets Act (DTSA) of 2016 has allowed the protection of trade secrets to expand towards the federal court system, making it one of the most dynamic changes to intellectual property protection in years (Goldman, 2015).  Signed in 2016 under the Obama Administration, the Act has provided an avenue for trade secret owners to use private federal lawsuits/court to challenge those that have allegedly stolen their trade secret.  Prior to this Act, only state law could have been applied to trade secret violations, with punishments/costs varying between state courts due to the protection granted by the Uniform Trade Secrets Act[1] (UTSA).  Both have set a foundation for trade secret definition and fines for conviction, but the DTSA grants more power for trade secret owners to protect their company’s profits.

The DTSA builds upon the 1996 Economic Espionage Act (EEA), which specializes in dealing with industrial espionage.  It has intensified the fines for convicted trade secret appropriators to be greater than $5 million plus three times the value of the stolen trade secret.  In addition, it grants the trade secret owner the right to request the U.S. government to acquire any and all assets deemed necessary to prevent further spread of the stolen secret through the process of applying for an ex parte seizure[2] (Congress, 2016).  Although a hearing is required after a week of filing the seizure for proof of the intention to use, distribute, or destroy the secret, no notification is required to be given to the accused (unlike the UTSA), which greatly reduced the odds of the valuable trade secret being devalued or tampered/destroyed.  This has given trade secrets owners a larger edge in power in terms of defending their intellectual property.

In addition to giving trade secret owners more control over their intellectual property, it has also given the accused party certain levels of protection as well depending on the trade secret involved.  If the business model of the secret could be deemed illegal or unethical, the individual/party with that secret could seek a pardon under the DTSA upon revealing the information.  Under normal circumstances, they would have been considered whistleblowers who would have been convicted to the fullest extent of the law along with the company. However, the DTSA grants legal immunity to those that release the information to government officials (in confidence) of the trade secret if it is proven that the secret violates U.S. law (Congress, 2016).  Notably, companies must now inform and/or educate their employees about this immunity, or else forfeit their right for winning exemplary damages or attorney fees against an employee regarding trade secret violation[3] (Morning, 2016, p. 22).  This protection granted towards whistleblowers acts as a check and balance for trade secret owners should the secret not comply with the U.S. law.

While it has granted trade secrets owners greater protection against trade secret theft, there have been a number of criticisms regarding the DTSA’s usage.  Some argue that it gives trade secret owners too much control, as trade secrets are intertwined with a large part of any business, particularly in the hiring/firing phase of the workplace.  In addition, the seizure usage could give trade secret holders an anti-competitive advantage to other companies.  For instance, Goldman (2015) cites multiple incidents of the Immigration and Customs Enforcement’s (ICE) frequent seizures of domain names as proof of the damages caused by ex parte seizures, causing damage to about 84,000 different websites[4] (p. 302).   This led to him making a conclusion about this power, in that “because ICE’s erroneous seizures are tantamount to shutting down legal speech, the seizures of completely legal domain names raise obvious Constitutional problems” (p. 300).  Ultimately his argument points out that the grant of ex parte seizures to trade secret owners could lead to equal, if not more damages like the incident above to smaller, innocent businesses, and can lead to abuse and/or suppression of Amendment 1 against other competitors if granted to trade secret holders. The legal immunity granted to whistleblowers is also argued to be a problem, as the whistleblower in mind would still have to go through reputational damage regardless of the outcome of the federal case.  In general, the allocation of resources to federal lawsuits would also make court costs go up significantly compared to keeping the case at the state level.  Goldman, Levine, Sadine and Seaman (2015) argue against the DTSA in their letter,[5] regarding that “median litigation costs through the end of discovery ranged from $250,000 in cases where less than $1 million was at stake, to over $1.6 million in cases where over $25 million was at risk” (p. 6).   Although there have been many criticisms over the Act, the impact and execution of the DTSA has yet to be fully realized because of its recent ratification as of 2016.  More cases will need to apply the DTSA before its overall impact can be fully analyzed.

In conclusion, the DTSA could be considered a spiritual successor to the UTSA, which gave each state the power to enforce trade secret violations.  However, there are significant difference between the DTSA and the UTSA.  In particular, the DTSA can be considered a specialization of the UTSA, focusing primarily on trade secret cases that involve out-of-state and foreign commerce, allowing for companies to protect trade secrets against out-of-state and foreign rivals.  Unlike the UTSA, it also has the potential to grant whistleblowers legal immunity if the trade secrets they have stolen were reported to be illegal to government officials.  The decision to use UTSA or DTSA comes with notable benefits and challenges for all sides involved, though DTSA appears to be a very promising extension to the protection that trade secrets need to give itself an equal level of protection with the other aspects of intellectual property.

Difference Between the Defend Trade Secrets Act and Uniform Trade Secrets Act
  Defend Trade Secrets Act Uniform Trade Secrets Act
Trade Secret Definition/Coverage “All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information,” [6] (Cornell, 2016). “Information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy,” [7] (Uniform Law, 1985, p. 5).
Prosecution Trade secret lawsuit can be prosecuted up to Federal court.  State procedural hurdles are ignored, except for the following condition:

·         If jurisdiction law does not permit restriction of practicing in a lawful profession, trade, or business[8] (Cornell, 2016).

Trade secret lawsuit can be prosecuted up to State court.  Conflict for prosecution can occur when states have different UTSA standards.
Injunctions Available for employer against employee or former employer, except in situations below:

·         Cannot prevent accused from entering employment relationships

·         Cannot conflict with state law that does not permit restriction of practicing in a lawful profession, trade, or business (Cornell, 2016).

Available for both employer and employee.
Whistleblower Immunity Status Guarantees whistleblower protection if trade secret contains information that violates U.S. law (and is reported to government official in confident). Does not guarantee whistleblower protection.
NDAs in Court Trade secret owners can file a case under seal before going to court to avoid secret disclosure Trade secret disclosure protection will vary state by state.  Not always guaranteed due to differing UTSA standards in each state.
Ex Parte Seizure Grants an ex parte seizure for trade secret owners under certain conditions; prevents the accused from being notified about seizure. Unavailable; requires the accused party to be notified of any seizure of assets before execution.

Conditions vary with each state due to differing UTSA standards.

Attorney Fees and Damage Rewards Available for proven and/or threatened counts of misappropriation, though employer/plaintiff must take into consideration:

·         If employer has not made employee aware of whistleblower immunity status granted by DTSA, attorney fees and damages may not be awarded.

Available for proven and/or threatened counts of misappropriation.

 

 

 

Trials Involving the DTSA

The following is a summary of some of the trials that have occurred with the implementation of the DTSA.

Bonamar v. Turkin and Supreme Crab

Bonamar, a crab supplier, accused his ex-VP Turkin for sharing trade secrets (customer and pricing information) to Indonesian rival, Supreme Crab, after receiving phone calls from customers about receiving cheaper crab meat prices after Turkin’s departure and employment into Troy at Supreme.[9]  Bonamar sued under the DTSA and the Florida UTSA for breach of contract.  Turkin argued that the information was not secretive.  Both reached a settlement before a final decision was reached.[10]

Ooo Brunswick Rail Mgmt. v. Sultanov

After Brunswick noted suspicious behavior in the defendant and confirmed that defendant’s work email showed messages sent to his personal email containing confidential documents, in combination with his refusal to return the company owned laptop/phone and prohibited contact with a former employee and a creditor of the company, Brunswick sued under DTSA and ordered an ex parte seizure of the defendant’s assets, one of the first times the order was requested.[11]  The ex parte seizure request was denied,[12] and instead ordered a temporary restraining order to the defendant to cease spreading of information.  This case is still ongoing.

Henry Schein, Inc. v. Cook

In the case of Henry Schein, Inc. v. Cook, a temporary restraining order was granted for the plaintiff against the defendant from accessing misappropriated data and contacting former clients involved with the business upon leaving the job and joining a rival competitor’s business.[13]  The reasoning for the restraining order was argued by the judge himself,[14] noting a likelihood of damage that Cook can cause to the plaintiff beyond a reasonable doubt.  This case has concluded.

M.C. Dean, Inc. v. City of Miami Beach

M.C. Dean filed a DTSA lawsuit against City of Miami Beach for exchanging confidential employee records to Local 349.[15]  The lawsuit was dismissed as the plaintiff was unable to show proof that he took reasonable measure to keep his trade secret confidential.[16]

 

 

 

References

Bonamar v. Turkin and Supreme Crab, 1:16-CV-21746 (Federal Court, FL. 2016).

Congress. (2016). S.1890 – Defend Trade Secrets Act of 2016. Retrieved from https://www.congress.gov/bill/114th-congress/senate-bill/1890

Cornell University Law School. (2016). 18 U.S. Code § 1836 – Civil proceedings. Retrieved from https://www.law.cornell.edu/uscode/text/18/1836

Cornell University Law School. (2016). 18 U.S. Code § 1839 – Definitions. Retrieved from https://www.law.cornell.edu/uscode/text/18/1839

Deakins, O. (2016). California court declines to issue DTSA Seizure order.  Lexology. Retrieved from http://www.lexology.com/library/detail.aspx?g=eebcad49-339a-4faa-88d1-9a73bb6a1a76

Goldman, E. (2015). Ex Parte Seizures and the Defend Trade Secrets Act. Washington and Lee Law Review Online, 72 (2-4), 284-307.

Goldman, E., Levine, D., Sadine, S., & Seaman, C. (2015). Professors’ letter in opposition to the Defend Trade Secrets Act of 2015. Stanford University. Retrieved from https://poseidon01.ssrn.com/delivery.php?ID=7931160040731200161070200841150000991220220370160060650771160130051240100951190050270000611190430190591240980230290791121241010270530580760460070250920640930660710410390340090750890840991131131111271090850291060

Henry Schein, Inc. v. Cook, 16-cv-03166-JST (Federal Court, N.D. Cal. 2016).

M.C. Dean, Inc. v. City of Miami Beach (Federal Court, FL. 2016).

Mornin, J. D. (2016). What you need to know about the Defend Trade Secrets Act. Intellectual Property & Technology Law Journal28 (9), 20-23.

Ogletree, D. (2017). California court declines to issue DTSA seizure order. Lexology. Retrieved from http://www.lexology.com/library/detail.aspx?g=eebcad49-339a-4faa-88d1-9a73bb6a1a76

Ooo Brunswick Rail Mgmt. v. Sultanov, 5:17-cv-00017-EJD (Federal Court, N.D. Cal. 2017).

Smith, D. (2016). Bonamar, ex-VP Turkin reach settlement in trade secret theft suit. Under Current News. Retrieved from https://www.undercurrentnews.com/2016/08/05/bonamar-ex-vp-turkin-reach-settlement-in-trade-secret-theft-suit/

Tigar, J. (2016). Henry Schein, Inc. v. Cook. Trade Secrets Institute. Retrieved from http://tsi.brooklaw.edu/cases/henry-schein-inc-v-cook

Toren, P. J. (2016). The Defend Trade Secrets Act. Intellectual Property & Technology Law Journal28 (7), 3-12.

Uniform Law. (1985). Uniform Trade Secrets Act with 1985 Amendments. Retrieved from http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf

 

 

[1] Each state that verified the UTSA into law made their own interpretations as to what is enforced, such as the California Uniform Trade Secrets Act (CUTSA), the Florida Uniform Trade Secrets Act (FUTSA), and so forth.

[2] An ex parte seizure allows for a company to request a federal judge to approve a seizure of assets without the presence of the other party.

[3] See Joseph Morning, What you need to know about the Defend Trade Secrets Act. Intellectual Property & Technology Law Journal, 28 (9), (Sep. 2016).

[4] Although the assets seized by ICE were labeled under copyright and trademark infringements, the same ex parte seizure procedure had been applied, and it has been proven that the seized assets were not infringing on any rights, a reoccurring error with ICE’s request (Goldman, 2015, pp. 300-301).  See Eric Goldman, Ex Parte Seizures and the Defend Trade Secrets Act, 72 (2-4), Washington and Lee Law Review Online, (Nov. 30, 2015).

[5] Professors’ letter in opposition to the Defend Trade Secrets Act of 2015, in which 42 law professors state their argument against the DTSA, ranging from ex parte seizure abuse to damages to smaller companies, in an attempt to persuade the chairman to not approve of the bill. For more details, see Goldman, Levine, Sadine & Seaman. Professors’ letter in opposition to the Defend Trade Secrets Act of 2015., Stanford University, (Nov. 17, 2015), https://poseidon01.ssrn.com/delivery.php?ID=7931160040731200161070200841150000991220220370160060650771160130051240100951190050270000611190430190591240980230290791121241010270530580760460070250920640930660710410390340090750890840991131131111271090850291060

[6] See U.S. Code § 1839 – Defines trade secrets in terms of DTSA.

[7] See Section 1.4 of the Uniform Trade Secrets Act – defines trade secrets in terms of the UTSA.

[8] See 18 U.S. Code § 1836 – Civil proceedings that affect DTSA’s application in certain states depending on job practice

[9] See Bonamar v. Turkin and Supreme Crab, 1:16-CV-21746 (Federal Court, FL. 2016).

[10] Turkin agreed to “return and destroy any and all data, documents, and materials pertaining to Bonamar’s business in his possession … Supreme and Turkin must not use any information received” (Smith, 2016, para. 6).  See Jason Smith, Bonamar, ex-VP Turkin reach settlement in trade secret theft suit. Under Current News (Aug. 5, 2016), https://www.undercurrentnews.com/2016/08/05/bonamar-ex-vp-turkin-reach-settlement-in-trade-secret-theft-suit/

[11] See Ooo Brunswick Rail Mgmt. v. Sultanov, 5:17-cv-00017-EJD (Federal Court, N.D. Cal. 2017).

[12] The court argued that “its preservation order, along with its directive that the employee not access the disputed devices and the requirement that the employee bring the devices to the next court hearing, was sufficient protection of the evidence” (Deakins, 2017).  See Ogletree Deakins, California court declines to issue DTSA Seizure order.  Lexology. (Jan. 17, 2017), http://www.lexology.com/library/detail.aspx?g=eebcad49-339a-4faa-88d1-9a73bb6a1a76

[13] See Henry Schein, Inc. v. Cook, 16-cv-03166-JST (Federal Court, N.D. Cal. 2016).

[14] Judge Tigar (2016) argued for the restraining order, noting that “(1) there was a likelihood of irreparable injury to HSI, (2) HSI was likely to succeed on the merits, (3) Cook was not likely to suffer undue hardship, and (4) public interest would be served by protecting trade secrets” (para. 4).  See Jon Tigar, Henry Schein, Inc. v. Cook. Trade Secrets Institute, (Jun. 10, 2016), http://tsi.brooklaw.edu/cases/henry-schein-inc-v-cook

[15] See M.C. Dean, Inc. v. City of Miami Beach (Federal Court, FL. 2016).

[16] The contracts M.C. Dean presented to the case were nonbinding and therefore were not enough to prove that he went through significant means of protecting his trade secret.

Patent and Copyright Reform Update

by

Michael Small

Congressman Bob Goodlatte, Chairman of the House Judiciary Committee, has announced that he will reveal a number of proposals to take place through the year during his speech at the 115th Congress that would reform intellectual property, targeting patent litigation cases and the Copyright Office.[1]  This reform is built upon his reflection of what is hindering American business.  In his perspective, he argues that the rising number of regulations and ‘red tape’ placed on businesses are causing a greater hindrance on entrepreneurs and companies with regard to innovation and competition.  Therefore, he will put his focus on making America competitive again by making the legal system fair and efficient.  In particular, he emphasized on making it more difficult for lawyers to ‘game’ the legal system by discouraging abusive patent litigation cases or ‘truly frivolous lawsuits,’ from occurring or accumulating high damage costs, often caused by aggressive ‘patent trolls.’[2]

One of the first proposals to reflect his speech in the 115th Congress[3] has already been submitted at the end of 2016, in which he targeted a total reform of the Copyright Office’s management of power.  The proposal stated that the Copyright Office should maintain its own autonomy over budget and needs for technology (while still being included as part of the Library of Congress).  In addition, he requested that the Copyright Office be reorganized to have the same nominational progress as government officials,[4] such as having the Register of Copyright elected, serving a 10-year term before re-elections, and being advised by a committee (Goodlatte, 2016).  He argues that these positions will allow the American population to provide input as to who will represent the copyright process.  Goodlatte also proposed for the Copyright Office to create and maintain a digital, searchable database of filed copyrighted work in the U.S.  Along with this establishment, he proposes that the Copyright Office make their database open for public use and browsing, with the option to charge users a fee for using its database or for letting copyright owners add extra metadata into their registered goods.  This proposal is a reference to the rapid advancement and popularity of technology in the 21st century and of how to accommodate this movement effectively without being ‘left behind.’  According to Goodlatte, this is just the beginning of many policy proposals he will make and support throughout the year in order to fully reform copyright law into the environment that is needed to make American businesses remain leaders in creativity and innovation.

Although so far Goodlatte’s proposal for changing the Copyright Office has been met with positive reception, efforts to enforce copyright reforms in the past have been met with numerous levels of backlash.  For instance, the last attempt at proposing bills that would have strengthened copyright protection, the Stop Online Piracy Act (SOPA) and Protect Intellectual Property Act (PIPA), has gathered very negative reception all throughout the U.S.  SOPA in particular would have allowed the government to seize foreign website domain names that aimed at online piracy.[5]  However, several loopholes were located within the Act, such as holding search engines liable for infringement and allowing internet service providers to remove infringing websites from their domain name system, preventing users from accessing the website[6] (Yoder, 2016).  This would have bypassed previous protections granted by the approval of the Digital Millennial Copyright Act[7] (DMCA), to the point that SOPA could have granted internet service providers the power of censorship.  Over 115,000 websites, including Google and Wikipedia, protested against the bill,[8] gathering support and persuading government officials to withdraw their support until the bill failed to pass the Senate.  The negative reception SOPA and PIPA gathered had also left an influence on the congressmen, who had not proposed any other law that would affect copyright up until Goodlatte’s agenda for the 115th Congress.  Whether a similar backlash will be present with any of Goodlatte’s future proposals involving copyright will be unknown until more are announced and made aware to the public.  The reorganization of the Copyright Office, if passed by Congress, may be a gauge into the possibility of future reforms and modifications of copyright law depending on its reception to the public.

This is not the first time Goodlatte has called for reforms of intellectual property.  Previously he had attempted to modify how patent cases were processed by proposing the Innovation Act of 2013.  In an attempt to target and reduce the power that ‘patent trolls’ had on defendants, the regulation set by the act would have increased the transparency taking place between the plaintiff and defendant regarding the infringed material.  This meant that plaintiffs would have had to specify what part of the patent was being infringed, notably the following:

Each claim of each patent allegedly infringed, including each accused process, machine, manufacture, or composition of matter … alleged to infringe the claim; for each claim of indirect infringement, the acts of the alleged indirect infringer that contribute to, or are inducing, a direct infringement; the principal business, if any, of the party alleging infringement; the authority of the party alleging infringement to assert each patent and the grounds for the court’s jurisdiction; each complaint filed that asserts any of the same patents; and whether a standard-setting body has specifically declared such patent to be essential, potentially essential, or having potential to become essential to that body, as well as whether the United States or a foreign government has imposed any specific licensing requirements.[9]

As a further extension to the specified requirements, it would also require plaintiffs to pay for the defendant’s court costs should they lose the case, going as far as to affect the parties involved with supporting the plaintiff should they be unable to afford the costs, including shell companies.[10]  However, the bill has received some criticism among the audience it aimed to protect, especially from small businesses and independent inventors.  They argue that the proposal “places an unfairly high burden on patent holders, making it too difficult for small businesses or individual inventors — rather than large companies — to protect their patents … make money from research … [and inventor’s point of view] was missing” (Robertson, 2013).  This would mean that only larger companies would be able to properly benefit from the Innovation Act, as they could afford the investment of resources required to prove the legitimacy of their patent(s) should their patents be legitimately infringed.  In addition, the decline of patent cases in 2014 has made support for the bill reach a stalemate, ultimately being rejected by the Senate in the 114th Congress.

A similar bill was announced in 2015 known as the Protecting American Talent and Entrepreneurship (PATENT) Act.  While it addresses similar issues brought up by the Innovation Act of 2013, it also adds protection to the values of patent and/or trade secret IP that would have eroded under the Innovation Act and provides some level of protection involved with parties that are supporting the plaintiff.  However, this bill faced opposition as the language for the customer stay is unclear.[11]  This uncertainty once again provided potential favorability towards larger corporations, thus receiving little support and not being able to move forward in congress.  It may be possible for Goodlatte to reintroduce the Innovation Act or the PATENT Act in some form as part of the promises he made in the 115th Congress, but to what extent will be up to discretion.

It is possible for other congressmen and senate members to introduce bills that would also reform patent and copyright to their preference.  However, there appears to be limited interest in Congress to move the bills forward for approval.  For instance, Senator Chris Coon made a proposal in response to America’s patenting system switching to the first-to-file system[12] known as the Support Technology and Research for Our Nation’s Growth (STRONG) Patents Act. This bill, if approved, would have allowed the Federal Trade Commission to target ‘patent trolls’ that make abusive demand letters and monitor the impact the patent system has on smaller businesses.  Michael Burgess’s Targeting Rogue and Opaque Letters (TROL) Act would have targeted demand letters made in bad faith in terms of representations, compensation requests, or omissions.  Jared Polis’s Demand Letter Transparency Act would have made an archive of all demand letters sent by ‘patent trolls,’ or (companies that sent many), with some exceptions such as original works or educational centers.  All of these bills have stalled in Congress, with few of them, if any, being reviewed in a timely manner.

In conclusion, should Goodlatte’s copyright reform proposal be put forward and approved by the senate, his speech at the 115th Congress may have provided the inspiration needed to resurge interest within congressmen to partake in the reformation of the copyright system and for members to compromise with each other to find the best solution to deal with ‘patent trolls’ while providing proper support for patent protection for individuals, small and large businesses.  With the majority of congress now held by a Republican majority after the elections of 2016, there may be a greater chance for congressmen to make a unified decision and/or consensus regarding the handling of copyright and patent reforms.

 

[1] See Gene Quinn, Goodlatte pledges to pursue patent litigation reform, copyright reform in 115th Congress, IPWatchdog, (2017), http://www.ipwatchdog.com/2017/02/01/goodlatte-patent-litigation-reform-copyright-reform/id=77879/

[2] A patent troll is defined by Chief Judge Rader as “any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art.”  See Peter Calcara, Patent trolling: What it is and why it is important to CPAs, (Apr. 18, 2016), https://www.picpa.org/articles/cpa-now-blog/cpa-now/2016/04/18/patent-trolling-what-it-is-and-why-it-is-important-to-cpas

[3] See Bob Goodlatte, Goodlatte announces agenda for 115th Congress. House of Representatives: Judiciary Committee, (2017), https://judiciary.house.gov/press-release/goodlatte-announces-agenda-115th-congress/

[4] “The Copyright Office should also add several positions to advise the Register including a Chief Economist, Chief Technologist, and a Deputy Register.” See Bob Goodlatte, Reform of the U.S. Copyright Office, House of Representatives: Judiciary Committee, (2016), https://judiciary.house.gov/wp-content/uploads/2016/12/Copyright-Reform.pdf

[5] See H.R.3261

[6] “Some parts of the legislation, for example, would hold search engines that led their users to pirated content liable for infringement … permitted internet service providers (ISPs) to remove allegedly infringing websites from the domain name system.”  See Christain Yoder, A post- SOPA (Stop Online Piracy Act) shift in international intellectual property norm creation. Journal of World Intellectual Property, 15(5/6), (2012)

[7] See 17 U.S. Code § 512.

[8] See Jenny Wortham, Public outcry over antipiracy bills began as grass-roots grumbling, New York Times, (2012), http://www.nytimes.com/2012/01/20/technology/public-outcry-over-antipiracy-bills-began-as-grass-roots-grumbling.html?pagewanted=1&ref=technology

[9] See H.R. 3309.

[10] Shell companies are generally identified as “companies that don’t manufacture anything but hold a number of patents … sending threatening letters to companies claiming they have been violating one or more of their (often vaguely defined) patents.”  See Jonathan Griffin, Patent trolls’ hefty tolls: Lawmakers target shell companies that threaten small businesses with bogus claims of patent violations, State Legislatures, 10, (2014).

[11]  “… language in the proposed legislation does not so limit stays … The concern consistently raised by the Innovation Alliance is that anyone could be a customer, including large corporations.” See Gene Quinn, Mixed Reviews for the PATENT Act in the Senate, IPWatchdog, (2015), http://www.ipwatchdog.com/2015/05/04/mixed-reviews-for-the-patent-act-in-the-senate/id=57457/

[12] In 2011, Obama signed the Leahy-Smith America Invents Act, which shifted patent right permissions in the U.S. from a first-to-invent system to first-to-file.

 

References

Calcara, P. (2016). Patent trolling: What it is and why it is important to CPAs. Pennsylvania Institute of Certified Public Accountants. Retrieved from https://www.picpa.org/articles/cpa-now-blog/cpa-now/2016/04/18/patent-trolling-what-it-is-and-why-it-is-important-to-cpas

Congress. (2012). H.R.3261 – Stop Online Piracy Act. Retrieved from https://www.congress.gov/bill/112th-congress/house-bill/3261

Congress. (2014). H.R.3309 – Innovation Act. Retrieved from https://www.congress.gov/bill/113th-congress/house-bill/3309

Cornell University Law School. (2010). 17 U.S. Code § 512 – Limitations on liability relating to material online. Retrieved from https://www.law.cornell.edu/uscode/text/17/512

Goodlatte, B. (2016). Reform of the U.S. Copyright Office. House of Representatives: Judiciary Committee. Retrieved from https://judiciary.house.gov/wp-content/uploads/2016/12/Copyright-Reform.pdf

Goodlatte, B. (2017). Goodlatte announces agenda for 115th Congress. House of Representatives: Judiciary Committee. Retrieved from https://judiciary.house.gov/press-release/goodlatte-announces-agenda-115th-congress/

Griffin, J. (2014). Patent trolls’ hefty tolls: Lawmakers target shell companies that threaten small businesses with bogus claims of patent violations. State Legislatures, 10, 28-31.

Quinn, G. (2015). Mixed reviews for the PATENT act in the senate. IPWatchdog. Retrieved from http://www.ipwatchdog.com/2015/05/04/mixed-reviews-for-the-patent-act-in-the-senate/id=57457/

Robertson, A. (2013). House of Representatives passes widely supported bill to fight patent trolls. The Verge. Retrieved from http://www.theverge.com/2013/12/5/5177802/house-of-representatives-passes-goodlatte-patent-troll-act

Wortham, J. (2012). Public outcry over antipiracy bills began as grass-roots grumbling. New York Times. Retrieved from http://www.nytimes.com/2012/01/20/technology/public-outcry-over-antipiracy-bills-began-as-grass-roots-grumbling.html?pagewanted=1&ref=technology

Yoder, C. (2012). A Post- SOPA (Stop Online Piracy Act) shift in international intellectual property norm creation. Journal of World Intellectual Property15 (5/6), 379-388.

[1] See Gene Quinn, Goodlatte pledges to pursue patent litigation reform, copyright reform in 115th Congress, IPWatchdog, (2017), http://www.ipwatchdog.com/2017/02/01/goodlatte-patent-litigation-reform-copyright-reform/id=77879/

[2] A patent troll is defined by Chief Judge Rader as “any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art.”  See Peter Calcara, Patent trolling: What it is and why it is important to CPAs, (Apr. 18, 2016), https://www.picpa.org/articles/cpa-now-blog/cpa-now/2016/04/18/patent-trolling-what-it-is-and-why-it-is-important-to-cpas

[3] See Bob Goodlatte, Goodlatte announces agenda for 115th Congress. House of Representatives: Judiciary Committee, (2017), https://judiciary.house.gov/press-release/goodlatte-announces-agenda-115th-congress/

[4] “The Copyright Office should also add several positions to advise the Register including a Chief Economist, Chief Technologist, and a Deputy Register.” See Bob Goodlatte, Reform of the U.S. Copyright Office, House of Representatives: Judiciary Committee, (2016), https://judiciary.house.gov/wp-content/uploads/2016/12/Copyright-Reform.pdf

[5] See H.R.3261

[6] “Some parts of the legislation, for example, would hold search engines that led their users to pirated content liable for infringement … permitted internet service providers (ISPs) to remove allegedly infringing websites from the domain name system.”  See Christain Yoder, A post- SOPA (Stop Online Piracy Act) shift in international intellectual property norm creation. Journal of World Intellectual Property, 15(5/6), (2012)

[7] See 17 U.S. Code § 512.

[8] See Jenny Wortham, Public outcry over antipiracy bills began as grass-roots grumbling, New York Times, (2012), http://www.nytimes.com/2012/01/20/technology/public-outcry-over-antipiracy-bills-began-as-grass-roots-grumbling.html?pagewanted=1&ref=technology

[9] See H.R. 3309.

[10] Shell companies are generally identified as “companies that don’t manufacture anything but hold a number of patents … sending threatening letters to companies claiming they have been violating one or more of their (often vaguely defined) patents.”  See Jonathan Griffin, Patent trolls’ hefty tolls: Lawmakers target shell companies that threaten small businesses with bogus claims of patent violations, State Legislatures, 10, (2014).

[11]  “… language in the proposed legislation does not so limit stays … The concern consistently raised by the Innovation Alliance is that anyone could be a customer, including large corporations.” See Gene Quinn, Mixed Reviews for the PATENT Act in the Senate, IPWatchdog, (2015), http://www.ipwatchdog.com/2015/05/04/mixed-reviews-for-the-patent-act-in-the-senate/id=57457/

[12] In 2011, Obama signed the Leahy-Smith America Invents Act, which shifted patent right permissions in the U.S. from a first-to-invent system to first-to-file.

New Defend Trade Secrets Act

By Samantha Leiner

Congress added a new section to the federal criminal trade secret law enacted on May 11, 2016, which allows owners of a trade secret to now file a civil action for misappropriation of that trade secret.  See 18 U.S.C. § 1836(b). The new act is referred to as the Defend Trade Secrets Act of 2016 (DTSA).

 

Before the addition of the DTSA, trade secret misappropriation issues were governed by state laws, in which 47 states have adopted their trade secret laws from by the Uniform Trade Secret Act (UTSA).   The UTSA was published in 1979, and amended in 1985, in an effort to make the ever-growing state common law on trade secrets more uniform throughout the country.  The three states that have not adopted the UTSA are New York, North Carolina, and Massachusetts.

While the DTSA and the UTSA share some common aspects, there are three major differences between them.

Filing an Ex Parte Application for the Seizure of the Misappropriator’s Property

The first major difference between the DTSA and the UTSA/state laws is that the DTSA allows for trade secret owners to file (and the court to order) an ex parte application  for the seizure of the trade secret misappropriator’s “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action” as a preventative measure and only in extraordinary circumstances.  18 U.S.C. § 1836(b)(2)  The eight requirements for the court to order a civil seizure are: 1) relief under Fed. R. Civ. P. 65 would be inadequate; 2) an immediate and irreparable harm will occur if not ordered; 3) harm to applicant would be greater than the other party’s legitimate interests; 4) the applicant is likely to succeed in showing the information is a trade secret and the opposing parting either misappropriated the trade secret by improper means or conspired to use improper means to misappropriate a trade secret; 5) the other party has possession of the trade secret and any property to be seized; 6) the application is detailed as to what property would be seized; 7) if applicant were to give notice of seizure to the other party, that party would destroy or otherwise make inaccessible the property to be seized; and 8) the requested seizure has not been publicized by the applicant. See 18 U.S.C. § 1836(b)(2); see also Fed. R. Civ. P. 65 (Remedies under Rule 65 includes preliminary injunctions, injunctions, and temporary restraining orders).

Ex parte seizures are not a new concept to intellectual property overall.  In both copyright infringement actions and trademark infringement actiosn the court may issue an ex parte civil erizure order.  See 15 U.S.C. § 1116(d)(1)(A) (trademark ex parte seizures); see also 17 U.S.C. § 503 (copyright ex parte seizures).  The requirements for both trademark ex parte seizures and copyright ex parte seizures are similar to the requirements for ex parte seizures under the DTSA listed above.  However, the DTSA’s civil seizure differs from the trademark and copyright ex parte seizures as far as what may be seized.  Usually, in trademark and copyright ex parte seizures, the seizure is limited to infirnging goods or evidence of infringement.  However, the DTSA states that a court can order seizure of “property necessary to prevent the propagation ro dissemination of the trade secret.” 18 U.S.C. § 1836(b)(2)(A)(i). This language in the DTSA does not specifically state what the ex parte seizure is limited to.  Possibilities of property that may be seized would be devices contaning trade secret information, like cell phones, computers, or tablets; devices in which the trade secret can be potentially transmitted, like email servers; products that were created using the trade secret, which could be reverse engineered by others exposing the trade secret.  While the DTSA is fairly broad in what can be seized, it limits the ex parte seizure to the “narrowest seizure of property necessary,”, and the seizure cannot unnecessarily interupt business operations of the accused persons or companies misappropriating the trade secret.  18 U.S.C. § 1836(b)(2)(B)(ii).

Public Policy Immunity 

The second major difference between the DTSA and the UTSA/state laws is that the DTSA includes a section that creates a public policy immunity to people who disclose a trade secret through confidential disclosure to the government, to report or investigate any violation of law, or is made in a court filing, if under seal.  See 18 U.S.C. § 1833.  This exception offers protection to whistleblowers, in which the government incentivizes citizens to help uphold the law. Before the DTSA was enacted, companies would use the various state trade secret laws against whistleblowers who used trade secret information to reveal to the state or federal government illegal activity their employer was involved in.  This is because state trade secret laws that were adopted from the UTSA do not have protection for whistleblowers.  Additionally, the whistleblower or other individuals may reveal the trade secret during a lawsuit for retaliation when the trade secrets are revealed under seal.

However, the DTSA does not protect a whistleblower from the consequences of violating a confidentiality agreement that the whistleblower signed with the company.  Because violating a confidentiality agreement can bear even harsher consequences than the DTSA, there seems to still be a disincentive for whistleblowers to reveal the secrets to the government or in trial.

Further, the DTSA incentivizes employers to inform their employees of the whistleblower protection in the DTSA by awarding exemplary damages or attorney fees to the employer in an action against an employee to whom notice of the whistleblower protection was provided.

 

Difference Between the Act’s Definition of a Trade Secret and the UTSA’s Definition

 

The third major difference between the UTSA and the DTSA is the definition of what a “trade secret” is.  The DTSA adopts the same definition as the Federal Economic Espionage Act, which is enacted under 18 U.S.C. § 1839.  Applying the same definition from the criminal statutes, such as the Federal Economic Espionage Act, to the civil statute, the DTSA, broadens the reach of the new statute to protect more secrets than the UTSA.  The UTSA’s definition of a trade secret is “‘[t]rade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Uniform Trade Secret Act, § 1(4).  While the DTSA’s definition of a trade secret is “‘trade secret’ means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”  18 U.S.C. § 1839(3).  The DTSA’s definition clearly broadens the definition from the UTSA to include new forms of trade secrets, such as plans, designs, prototypes, procedures, and codes, whether tangible or intangible.  However, the DTSA’s definition does limit the industries the information is about to financial, business, scientific, technical, economic, or engineering information.

The broadening of the forms the trade secret can take provides an avenue for protection to persons who would not be able to sue under the limited UTSA definition of what a trade secret is.  This means more people will be able to sue for trade secret misappropriation in federal court than were ever able to under the UTSA or state law.

Remedies Available under the DTSA

Another difference between the UTSA and the DTSA is that the remedies differ.  While both the UTSA and the DTSA provide for enjoining against actual or threatened trade secret misappropriation, the DTSA prohibits injunctions in certain cases: (1) an injunction cannot prevent a person from entering into an employment relationship; and (2) an injunction cannot interfere with applicable state law prohibiting restraints on the practice of “lawful profession, trade or business.” § 1836(b)(3)(A)(i)(II).  The first prohibition on injunctions for trade secret misappropriation under the DTSA seems to further and mirror California’s view that there can be no prohibiting former employees to have job mobility in the future.  This view is taken from California’s strict anti-non-competition stance on laws.

Additionally, granting injunctions (a remedy provided in the DTSA) can be seen as limiting a former employee’s movement to a competing company.  The DTSA allows for an injunction to be granted against a former employee if the threat of misappropriation is based on evidence and not speculation or that the former employee merely knows of the information.  However, the DTSA provides that this provision of allowing an injunction against a former employee will not be applicable if the proper “state law prohibit[s] restraints on the practice of lawful profession, trade, or business.” A prime example of this would be the anti-non-competition stance of California, where a law or the effect of a law cannot limit a former employee’s potential future employment relationships.  California is unlike any other state when it comes to non-competition, because in most states “reasonable” non-competition agreements are allowed, while in California all non-competition agreements are void.

Further, attorneys’ fees and punitive damages are available under both the UTSA and DTSA, but the DTSA limits attorneys’ fees and punitive damages to employers who gave notice to the employee/former employee of the whistleblower immunity protection of the DTSA.  In DTSA actions where an employer suse a former employee and the employee’s current employer, the failure to provide the notice will prevent an employer from being awarded attorneys’ fees and punitive damages.  However, a loophole to the employer having to give notice to an employee of the whistleblower immunity, is for the employer to only sue the former employee’s current employer, and not the former employer.

The Non-Preemptive Nature of the DTSA

Under this new statute, Congress made sure it was not disturbing any state laws already in place by not making the  DTSA preemptive of state law.  Congress simply wanted to create another avenue for trade secret owners when their trade secret is misappropriated.

Conclusion

The new statute seems to open up more avenues for trade secret owners to protect their rights, and seems to give the owners more rights than the UTSA or state law.

 

 

NantKwest, Inc. v. Lee

By Samantha Leiner

DISCUSSION ON STATUS OF CASE:  The only brief that has been filed in the Fed. Cir. regarding the appeal of the order on the Motion for Expenses by the Eastern District of Virginia is the Brief for Appellant filed by the PTO.  We are still waiting for the reply briefs by NantKwest, Inc. The Fed. Cir. has not heard oral arguments.

ISSUE: Whether the phrase “all the expenses of the proceeding” in 35 U.S.C. § 145 includes the personnel expenses actually incurred by the PTO in defending the proceeding.

FACTS: NantKwest, Inc. is the assigned owner of a patent application filed by a Dr. Hans Klingemann in 2001.  In 2010, an examining attorney rejected the application based on a finding of obviousness in view of two prior art.   In October 2013, the PTAB affirmed the rejection by the examining attorney.

In December 2013, NantKwest filed its complaint in the Eastern District of Virginia under § 145, seeking review of the PRAB decision.  The PTO informed NantKwest that it would be seeking personnel expenses as part of the “all expenses of the proceeding” stated in the statute that a plaintiff must pay.  During the course of the trial, both sides retained experts and filed multiple motions.  In early September 2015, the Court granted summary judgment in favor of the PTO, finding the claims in NantKwest’s patent application were obvious in light of prior art.   The court found the two prior art referenced by the PTO “disclose[d] all the elements of the claimed invention … [and] that it is clear that a person of skill in the art in 1997 would have had a reasonable expectation of success and a motivation to combine the [two] prior art references.” The court found judgment in favor of the PTO, and NantKwest filed a notice of appeal.  The appeal is still currently pending before the Federal Circuit.

Following the entry of the judgement, the PTO filed a motion for reimbursement of expenses of the proceeding, under § 145, including $78,592.50 of personnel expenses calculated as the pro rata share of the salaries of the two attorneys and one paralegal who worked on the case.  In addition to the personnel expenses, the PTO requested reimbursement of the expenses incurred with the retaining of an expert witness to assist in defending the PTO rejection to the district court.

BACKGROUND ON STATUTE:

When a patent applicant is disappointed in the outcome (rejection of their patent), they may appeal through judicial review in two ways.  First, they can appeal to the Fed. Cir. directly under 35 U.S.C. § 141. Alternatively, the patent applicant can appeal to the district as a civil action under § 145.

The advantages to electing to proceed under § 145 are that “the district court is not constrained by the administrative record before the agency, so the applicant may introduce new evidence and obtain a de novo judicial determination of the significance of that evidence.” However, the disadvantages to filing a proceeding under § 145 is that it is stipulated in § 145 that, win or lose, “[a]ll the expenses of the proceedings shall be paid by the applicant.”  § 145.

The expense-reimbursement provision of § 145 has been a part of patent law since the original Patent Act of 1836.  In the 1836 Act, Congress created the right to commence court proceedings in the district court as a review of the PTO.  Congress further amended the act to require the plaintiff to pay “the whole of the expenses of the proceedings.”  Act of Mar. 3, 1839 (1839 Amendments), ch. 88, § 10, 5 Stat. 353, 354.  In 1870, Congress revised the act to allow all disappointed patent applicants to utilize § 145 proceedings.

Congress further incorporated the “all the expenses of the proceeding” language in the Lanham Act.  The Fourth Circuit debated the provision in Shammas v. Focarino, where the Fourth Cir. found the expense-reimbursement provision of the Lanham Act did not violate the American Rule, which is that each party is responsible for his or her own attorneys’ fees, whether they win or lose, unless a statute or contract provides otherwise.

HOLDING OF DISTRICT COURT: The Eastern District of Virginia both granted in part and denied in part the PTO’s Motion for Expenses.  The Court granted the motion as far as the motion relates to the expenses the PTO incurred for expert witnesses.  However, the Court denied the motion regarding the PTO’s attorney’s fees, or personnel expenses.

ANALYSIS BY DISTRICT COURT:

The district court’s main reasoning for denying the PTO’s motion regarding personnel expenses is because it would violate the American Rule, which is that each party is responsible for his or her own attorneys’ fees, whether they win or lose, unless a statute or contract provides otherwise.   The court cites a Supreme Court case in which the Court found “departures from the American Rule are authorized only when here is a ‘specific and explicit provision[] for the allowance of attorneys’ fees under [the] selected statute[].’” NanKwest, Inc. v. Lee, 2016 U.S. Dist. LEXIS 14598, at *4 (E.D. Vir. 2016) (citing Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2010)).  The District Court seems to rely on the interpretation of “specific and explicit” to mean a statute allowing for attorneys’ fees/personnel expenses to be paid must state something more specific than “expenses,” such as “fees” or even “attorney’s fees.”

The Court states § 145 does not specifically or explicitly provide for attorneys’ fees or personnel expenses.  The Court states the PTO has the burden of showing § 145’s use of the term “expenses” specifically means attorneys’ fees. The court finds the PTO cannot prove “expenses” means attorneys’ fees because “in § 145’s entire two-hundred-year existence, it has never been interpreted as including attorneys’ fees in ‘expenses.’” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *5.  The court determined when Congress used the phrase “all of the expenses,” it merely meant to “point[] to a collection of the expenses used, commonly understood to encompass as printing, travel, and reasonable expert witness expenses.” Id.

The Court then emphasized the statue does not need to include the phrase “attorneys’ fees” in order to be able to depart from the American Rule, like in Baker Botts.  In Baker Botts, the Supreme Court concluded that the wording “reasonable compensation for actual, necessary services rendered” clearly authorized the award of attorneys’ fees. Baker Botts, 135 S. Ct. 2158.

The PTO then argued § 145 states just as clearly as the statute in Baker Botts that attorneys’ fees are included. However, the Court rejected that argument by stating the PTO “mischaracterized Baker Botts in two ways.” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *7.  First, the PTO’s argument is that “the Court, after agreeing the statute at issue allowed attorney’s fees, rejected an attorneys’ request to apply the statute to fees the attorney had personally accumulated while defending himself during fee litigation.” The Court rejected this argument because “the Supreme Court’s refusal to deviate from the American Rule in the single instance involving an attorney’s fee-defense litigation was based solely on the fact the litigation the attorney sought expenses for, was not classic example of adversarial litigation, where ‘one side’ is against ‘the other.’” The present case, the Court argues, is a “classic adversarial litigation,” and just because NantKwest brings the suit under § 145, which requires it to pay for all expenses, does not mean the suit is not adversarial.  The Court went further to even find that because the type of suits in question are “naturally adversarial,” the requirement of the plaintiff to pay all expenses is meant to deter litigation, not just to compensate the PTO.

Second, the PTO alleges the Supreme Court in Baker Botts allowed for the broad term “reasonable compensation” to allow the statute to deviate from the American Rule, therefore, the broad terms in § 145 should allow the statute to deviate from the American Rule.  The Court points out that when Congress intends for a statute to deviate from the American Rule, it has done so explicitly.  The Court further distinguishes § 145 from the statute in Baker Botts because the statute in Baker Botts did not simply state “reasonable compensation” but “reasonable compensation for actual, necessary services rendered.”  Baker Botts, 135 S. Ct. 2158.  The Court then provides many examples of what deviates from the American Rule.  See 11 U.S.C. § 363(n) (authorizing recovery of “any costs, attorneys’ fees, or expenses incurred”); 12 U.S.C. § 1464(d)(1)(B)(vii) (at the court’s discretion, obligating federal savings associations to pay “reasonable expenses and attorneys’ fees” in enforcement actions); 26 U.S.C. § 6673(a)(2)(A) (requiring lawyers who cause excessive costs to pay “excess costs, expenses, and attorneys’ fees”); 31 U.S.C. § 3730(d)(4) (authorizing, in false claims suit, “reasonable attorneys’ fees and expenses” to prevailing defendant); 12 U.S.C. § 5009(a)(1)(B) (holding party at fault liable for “interest and expenses (including costs and reasonable attorney’s fees and other expenses of representation)”); Fed. R. Civ. P. 37(a)(5)(A) (requiring party at fault to pay “reasonable expenses … including attorney’s fees”); Equal Access to Justice Act, 28 U.S.C. § 2412 (Section (a)(l) the act states “a judgment for costs … but not including the fees and expenses of attorneys;” section (b) notes “a court may award reasonable fees and expenses of attorneys;” subsection (2) it outlines the payment of “fees and expenses of attorneys;” and in section (d)(l)(A) it states “a court shall award … fees and other expenses, in addition to costs.“).

Lastly, the Court concluded the Fourth Circuit’s determination in the trademark case, Shammas v. Focarino, that the American Rule only applies when the prevailing party seeks fees is erroneous. See Shammas v. Focarino, 784 F.3d 219, 223 (4th Cir. 2015).  The Fourth Circuit concluded “the American Rule applies only in the context of a prevailing party seeking fees from a losing party.” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *12 (citing Shammas, 784 F.3d at 223 (concluding, “[t]hus a statute that mandates the payment of attorneys’ fees without regard to ta party’s success is not a fee-shifting statute that operates against the backdrop of the American Rule.”). The Fourth Circuit then decided that, “in the context of § 145, ‘[b]ecause the PTO is entitled to recover its expenses even when it completely fail, [§ 145] need not be interpreted against the backdrop of the American Rule.Shammas, 784 F.3d at 223.   The District Court found it was important to note the Baker Botts decision came out after the Shammas decision.

Further, the Court further noted the Shammas court cited to another Supreme Court case, Ruckelshaus v. Sierra Club, which only stated “the consistent rule is that complete failure will not justify shifting fees,” and decided nothing on whether the American Rule only applies to prevailing parties.  463 U.S. 680, 684 (1983).  Because Ruckelshaus did not talk about the American Rule, the District Court held it had no grasp on 15 U.S.C. § 1071(b)(3) of the Lanham Act, therefore no hold on determining § 145.    The Court then pointed out that neither the Shammas court nor the PTO had pointed out a Supreme Court case determining the American Rule only applies to prevailing parties.

Finally, the Court notes the Shammas court stated “even it has erroneously concluded that the term ‘expenses’ in § 145 deviates from the American Rule, its conclusion is nonetheless supported because it is clear from ‘ordinary parlance’ that ‘expenses’ is ‘sufficiently broad to include attorneys’ fees.’” NanKwest, Inc., 2016 U.S. Dist. LEXIS 14598, at *14.  However, the Court rejects this notion because it would then be misinterpreting the standard set by the Supreme Court in Baker Botts.  Because Congress must “speak” will “heightened clarity” to overcome the presumption of the American Rule, as stated by the Shammas court, § 145 is overly broad and does not depart from the American Rule.

ARGUMENTS OF PTO ON APPEAL:

The first part of the PTO’s argument on appeal is that personnel expenses incurred by the PTO during litigation brought under § 145 are “expenses of the proceeding” under § 145.  The PTO brings forth three reasons for this argument.  First, the PTO argue personnel expenses are “expenses of the proceeding” under § 145 because the plain language of the statute supports that finding.  The PTO states because, when interpreting a statute, the court must first consider the plain language of the statute, the Fed. Cir. should look at the plain meaning of the word “expense.”  According to the PTO, and Black’s Law Dictionary, an “expense” is an “expenditure of money, time, labor or resources to accomplish a result.” Black’s Law Dictionary 698 (10th ed. 2014).  The PTO further argues the Supreme Court has further defined “expenses” to include attorneys’ fees.  Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct .1997, 2006 (2012).  The PTO further argues the Fourth Circuit in Shammas, the only circuit to decide on the issue of whether expenses include attorney’s fees, stated that Congress was clear when it said “all expenses of a proceeding.”

Second, the PTO argues Congress intended to shift any, including attorneys’ fees and personnel expenses, to the plaintiff of a case brought under § 145 because Congress did not want the taxpayers or other PTO users to bear the expense of optional district court proceedings.  To support this view, the PTO cites to a Fed. Cir. case, Hyatt v. Kappos, which concluded Congress intended plaintiffs who brought the optional district court proceedings to bear the “heavy economic burden of paying ‘[a]ll the expenses of the proceedings’ regardless of the outcome.”  Hyatt v. Kappos, 625 F.3d 1320, 1337 (Fed. Cir. 2010).  The PTO focused on the fact that because proceedings under § 145 are optional, Congress did not want to place the burden on the PTO to bear.  The PTO further points out that because the PTO is now a user-funded agency, an implementation at Congress’ direction, Congress meant for the burden of the costs to be put on the plaintiff of a proceeding, not the PTO.  The PTO argues this “expense-reimbursement requirement” also deters gamesmanship by plaintiffs who might withhold evidence during PTO proceedings and present that evidence to the district court during the proceedings.

Third, the PTO argues § 145 has been a valid statute since it was enacted in 1836.  The PTO argues that because the statute has been around for almost 200 years, it further supports the notion that “expenses” includes personnel expenses and attorneys’ fees.  In the original Patent Act of 1836, Congress did define “expense” to include “the salaries of the officers and clerks herein provided for.”  1836 Act, § 9, 5 Stat. at 121.  Therefore, the PTO argues, Congress did intend on including personnel expenses in § 145.

The second part of the PTO’s argument on appeal is that the District Court erroneously analyzed § 145 as it pertains to the American Rule.  As summarizes above, the District Court determined the phrase “all the expenses of the proceeding” excludes personnel expenses and attorneys’ fees.   The PTO presents two reasons as to why this argument should prevail.  First, the PTO argues § 145 does not even implicate the American Rule at all.   The PTO points out that most statutes that deal with the American Rule only implicate the prevailing party, but here it does not matter if the plaintiff is the prevailing party or not under a § 145 ruling, the plaintiff still has to pay all expenses.  The PTO presents the same arguments presented above about the Shammas case and how § 145 does not constitute fee-shifting under the American Rule.  Throughout this argument, the PTO emphasizes that nothing in Baker Botts “suggests” or shows the American Rule would govern the interpretation of a statute like § 145, where it doesn’t matter if the PTO win or lose.  The PTO analogizes the proceedings under § 145 as an extension of the ex parte patent application process, therefore making the proceeding under § 145 a non-adversarial litigation. The PTO further argues this “expense-reimbursement provision” of § 145 is strikingly similar and essentially the same as the application fees to defray the PTO’s examination expenses.  The PTO analogizes the application fees to the expense reimbursement provision by stating the application fees are paid whether or not the application is successful.   The PTO also points out that the application fees, like the “expense reimbursement provision” of § 145, is meant to cover the costs of the examining attorney.  The PTO cited to a recent Supreme Court case, Sebelius v. Cloer, to show that the payment of attorneys’ fees regardless of the litigant’s success does not necessarily implicate the American Rule.

Second, the PTO argues if § 145 does implicate the American Rule, the plain language of § 145 exempts the statute from the traditional American Rule.  During this argument, the PTO recites its argument that the plain language in § 145 shows that “expenses” clearly means attorneys’ fee/personnel expenses, therefore departing the statute from the traditional American Rule.

 

Trader Joe’s Co. v. Hallatt, 981 Fed. Supp. 2d 972 (W.D. Wash. 2013).

This case is currently awaiting a decision from the Ninth Circuit.  Case No. 14-35035.

Facts and Procedural History:

Trader Joe’s, a specialty United States (“U.S.”) grocery store, filed a Lanham Act trademark infringement and dilution action against Canadian grocery store owner, Michael Hallatt.  To stand apart from its competition in the U.S., “Trader Joe’s developed a rustic South Pacific-inspired theme.”  Brief for Appellant at 6, Trader Joe’s Co. v. Hallatt, (No. 14-35035).  Although Trader Joe’s has a website that displays its products, Trader Joe’s only sells its products at its retail grocery stores in order “[t]o maintain the exclusivity of its branded products.”  Brief for Appellant at 7, Trader Joe’s Co. v. Hallatt, (No. 14-35035).  Trader Joe’s has received several U.S. trademark registrations for its marks, including “the word TRADER JOE’S for retail store services in the field of specialty foods and beverages (Trademark Reg. No. 2,171,157); for processed foods (Trademark Reg. No. 1,424,176); and for beverages (Trademark Reg. No. 2,158,990).”  Brief for Appellant at 10, Trader Joe’s Co. v. Hallatt, (No. 14-35035).  Moreover, Trader Joe’s owns a registration for its stylized word mark TRADER JOE’S for retail services.  Id.  Trader Joe’s operates more than 390 retail grocery stores in “30 states and the District of Columbia, including 14 stores in the state of Washington.”  Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 974.

Appellee, Michael Norman Hallatt, is a U.S. resident alien and a Canadian citizen. Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 976.  Hallatt “owns and operates a grocery store in Vancouver, British Columbia, Canada, operating under the name Pirate Joe’s.”  Id. at 975.  Hallatt’s store previously operated under the name “Transilvania Trading.”  Id.  Hallatt concedes that “he and others at his direction have purchased products at Trader Joe’s paying full retail prices in the state of Washington.”  Id.  Hallatt then transported the products across state borders to Canada and sold the goods unmodified in Pirate Joe’s.  Id.  Hallatt also “publically acknowledges the products he sells were purchased from Trader Joe’s.”  Id.

According to Trader Joe’s Opening Brief, Pirate Joe’s displays an identical South Pacific themed trade dress.  Brief for Appellant at 11, Trader Joe’s Co. v. Hallatt, (No. 14-35035) (“Pirate Joe’s is decorated in a manner evocative of Trader Joe’s famous and distinctive trade dress, including a colorful mural depicting a ship at sea, products sold on wooden shelves and in baskets, and hand-drawn signage.”).  Hallatt admitted that Pirate Joe’s used Trade Joe’s paper grocery bags in the past, but alleges that such practice has ceased. Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 975.  Unpleased by Hallatt’s actions, Trader Joe’s alleged that Pirate Joe’s used its marks to pass as an approved Trader Joe’s retailer.  Id.  As such, Trader Joe’s filed its Complaint in federal court against Hallatt, alleging trademark infringement, unfair competition, and federal trademark dilution.  Id.  Trader Joe’s also brought claims under state court.  Subsequently, Hallatt moved to dismiss for lack of subject matter jurisdiction, arguing that the Lanham Act should not apply extraterritorially in this case.  Id.

Reasoning and Holding:

Upon Hallatt’s motion to dismiss for lack of subject matter jurisdiction, the Washington District Court engaged in a lengthy analysis of the extraterritorial application of the Lanham Act.  See Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 976-81.  The court recited the Ninth Circuit’s three Timberlane factors that the Circuit uses to determine whether extraterritorial application is appropriate: “(1) the defendant’s actions creates some effect on American foreign commerce, (2) the effect is sufficiently great to present a cognizable injury to plaintiff under the Lanham Act, and (3) ‘the interests of and links to American foreign commerce [are] sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority.’”  Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 976 (citing Reebok Int’l v. Marnatch Enters., 970 F.2d 552, 554 (9th Cir. 1992)).

The court found that all three factors disfavored extraterritorial application.  In its analysis, the court combined the first two factors of the Timberlane test, stating that a plaintiff need only demonstrate that there is “some” effect on U.S. foreign commerce.  Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 977 (citing to Wells Fargo & Co. v. Wells Fargo Express Co., 556 F.2d 406, 428 (9th Cir. 1977)).  The court reasoned that “all alleged infringement takes place in Canada and Trader Joe’s cannot show economic harm,” so “there is no economic harm to Trader Joe’s because the products were purchased at Trader Joe’s at retail price.”  Id. at 977.  Comparing this case to Love v. Associated Newspapers, Ltd., 611 F.3d 601 (9th Cir. 2010), the court found the chance of confusion in Canada is likewise too great a stretch to claim harm in the U.S.  Id. (“Like in Love, any ‘goodwill’ related harm is too tenuous to support a cognizable Lanham Act claim when all infringing conduct is abroad.”).

The court balanced seven other relevant factors in analyzing the third factor of the Timberlane test.  Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 978.  Those seven relevant factors include: “The degree of conflict with foreign law or policy, the nationality or allegiance of the parties and the locations or principal places of business of corporations, the extent to which enforcement by either state can be expected to achieve compliance, the relative significance of effects on the United States as compared with those elsewhere, the extent to which there is explicit purpose to harm or affect American commerce, the foreseeability of such effect, and the relative importance to the violations charged of conduct within the United States as compared with conduct abroad.” Id. at 978 (citing Reebok, 970 F.2d at 555).  The only one of the seven relevant factors that the court found in favor of Trader Joe’s was nationality or allegiance of parties and locations of corporations.  Specifically, the court concluded that “Hallatt’s connections with the U.S. are likely sufficient to support extraterritorial jurisdiction.”  Id. at 979.  The court, nevertheless, decided that application of the Lanham Act could potentially conflict with Canada’s trademark law (and Trader Joe’s had two pending trademark applications in Canada).  Id.  After an evaluation of the Timberlane factors, the court found that it does not have subject matter jurisdiction in this case.  Id. at 980.

Two months after the decision, Judge Marsha J. Pechman dismissed Trader Joe’s remaining state law claims, finding that no party in the lawsuit was a Washington resident, all of the alleged wrongful conduct occurred out of state, and any harm to Washington residents was “extremely tangential.”  Order Granting Motion to Dismiss Amended Complaint at 10-11.  As such, Judge Pechman dismissed the case with prejudice. Trader Joes Co. v. Hallatt, 981 Fed. Supp. 2d at 981; Order Granting Motion to Dismiss Amended Complaint at 11.

Appeal:

Trader Joe’s appealed the district court decision.  In its Opening Brief, Trader Joe’s argues that the Lanham Act “is one of the few statues that Congress specifically extended beyond the borders of [the U.S.]”  Brief for Appellant at 27 (citing Steele v. Bulova Watch Co., 344 U.S. 280, 283, 286 (1952)), Trader Joe’s Co. v. Hallatt, (No. 14-35035).  Trader Joe’s asserts that Pirate Joe’s conduct is analogous to the defendant’s conduct in SteeleId. at 30-31.  Specifically, Trader Joe’s contends that “Hallatt’s activities in the United States – most notably obtaining goods from Trader Joe’s stores – were ‘essential steps in the course of business consummated abroad,’” and therefore, the U.S. purchases were part of Hallatt’s “unlawful scheme.”  Id. at 31 (citing Steele, 344 U.S. at 287).  Accordingly, Trader Joe’s submits that “[b]ecause the scheme directly involves U.S. domestic commerce, there is no need to consider whether Hallatt’s activity has ‘some effect’ on U.S. foreign commerce.”  Id. at 34 (citing Reebok Int’l Ltd. V. Marnatech Enters., Inc., 737 F. Supp. 1515, 1518 (S.D. Cal. 1989)).

Nevertheless, Trader Joe’s asserts that the Timberlane factors are satisfied in this case.  Brief for Appellant at 35, Trader Joe’s Co. v. Hallatt, (No. 14-35035).  Addressing the first two Timberlane factors jointly, Trader Joe’s argues that a customer who purchases a defective product – a product that does not adhere to Trader Joe’s quality control procedures – from Pirate Joe’s “would not be able to tell whether the defect is the fault of Trader Joe’s,” and thus “the customer would likely view Trader Joe’s less favorably, causing harm to the reputation and goodwill that Trader Joe’s has carefully cultivated over the past 40 years.”  Id. at 36-37.  Trader Joe’s contends that any issues with TRADER JOE’S branded products sold at Pirate Joe’s “would inevitably travel back to the United States, where it would injure Trader Joe’s reputation and goodwill.”  Id. at 37.

Trader Joe argues that the third Timberlane factor also favors a finding of subject matter jurisdiction. Id. at 42.  Likewise, Trader Joe’s accesses all seven sub-factors.  For the third sub-factor, Trader Joe’s asserts that because “Hallatt . . . admitted to hiring people in the state of Washington to purchase TRADER JOE’S-branded products for him,” he has “an even stronger ‘presence’ in the United States.”  Id. at 47 (citation omitted).  As such, Trader Joe’s asserts that Hallatt orchestrated the activities in the U.S. and is a permanent U.S. alien, his presence in the U.S. is strong, despite his Canadian citizenship.  Id.  Further, Trader Joe’s argues that the sixth sub-factor weighs in its favor because “[i]t was entirely foreseeable that by selling TRADER JOE’S-branded goods outside Trader Joe’s quality control structure, the goodwill and reputation of a U.S. company would be hurt in the United States.”  Id. at 49 (citing to Reebok, 970 F.2d at 557 (finding it “undeniabl[y]” foreseeable that defendant’s products sold in Mexico border towns would damage plaintiff’s brand in the United States).

Finally, Trader Joe’s claims that the district court erred in dismissing Trader Joe’s state law dilution claim and its CPA claim.  Id. at 50-57.  Focusing on the fact that Trader Joe’s operates 18 stores in Washington, Trader Joe’s asserts that a large portion of the resulting dilution from sick Vancouver residents will be felt in Washington.  Id. at 54.  Also, Trader Joe’s argues that the defendant’s conduct in “trade or commerce” is satisfied because “Hallatt engages in a persistent pattern of ‘trade or commerce’ by traveling into Washington, purchasing products from Trader Joe’s stores. . ., exporting the goods to Canada, and reselling them.”  Id. at 57.  Accordingly, Trader Joe’s urges the Ninth Circuit to reverse the district court’s decision.

Hallatt, on the other hand, argues that the district court properly dismissed Trader Joe’s Lanham Act claims for lack of subject matter jurisdiction, reiterating the district court’s reasoning.  Brief for Appellee at 10-20.  Hallatt analyzes the seven sub-factors of the Timberlane test and echoes the district court’s reasoning with all but one factor – the only factor found against him.  Id. at 32.  Finally, Hallatt argues that the district court properly dismissed Trader Joe’s state law claims and Washington Consumer Protection Act claims.  Id. at 39-54.

India Patent Act Changes

By Julie Shursky

Behind South Africa, India is managing the world’s second largest HIV treatment program.  In 2015, more than 900,000 patients received antiretroviral treatment in India.[1]  Despite the enactment of various government-funded health insurance programs and organizations to combat infectious and chronic diseases such as HIV/AIDS, the Indian government continues to struggle in financing adequate healthcare facilities for its citizens, causing a significant number of Indian citizens to “fund their health needs through out-of-pocket expenses.”[2]  In an effort to protect and manage its market, India enacted Section 3(d) and established patent laws that allow its government to grant compulsory licenses for pharmaceutical products.

In an effort to increase the availability of low-cost drugs, the Indian Patent Act of 1970 (“1970 Act”) prohibited the patentability of pharmaceutical products.[3]  The 1970 Act, however, permitted patents on the manufacturing process of said products,[4] which led to the booming of India’s generic drug sector through capitalizing on innovation by multinational companies that were unable to obtain patents under Indian law.  As a direct result of this legislation, India earned the nickname “pharmacy of the world” for its burgeoning production and exportation of generic pharmaceutical products.[5]

India’s fast-emerging pharmaceutical sector is broadly divided into two major groups: multinational pharmaceutical corporations or pharmaceutical MNCs, and domestic pharmaceutical corporations.[6]  The rivalry between brand-name drug makers, who seek patent protection and generic manufacturers, who sell lower-cost, copycat versions of medicines, has grown over the years.

The United States, for example, has expressed its concern with recent developments in India’s patentability standards and grants for compulsory licenses.[7]  In a report by the United States Trade Representative, the United States expressed particular concern with “[t]he unpredictable application of Section 3(d)” and “the lack of clarity on standards for Sections 85 and 92 compulsory licenses.”[8]  Unlike the United States, India’s patent laws limit evergreening[9] strategies and ensure that companies are receiving only a one-time price premium for their innovative products, rather than extending patent protection for minor enhancements.  As such, India’s patent laws do not support the extension of patent terms on current products, but rather require “enhancement of the known efficacy” for protection.[10]  Section 3(d), therefore, is only intended to prevent evergreening – it does not prevent the patenting of new, innovative drugs within the pharmaceutical industry.[11]

 

[1] SPOTLIGHT: Catalysing change for an AIDS-free generation in India, World Health Organization (July 25, 2016, 11:58 AM), http://www.who.int/hiv/pub/newsletter/hiv-hep_newsletter_mar2016/en/index7.html.

[2] Madhavi Chopra, Of the Big Daddy, the Underdog, the Mother Hen, and the Scapegoats: Balancing Pharmaceutical Innovation and Access to Healthcare in the Enforcement of Compulsory Patent Licensing in India, its Compliance with TRIPS, and Bayer v. Natco, 13 Santa Clara J. Int’l L. 333, 335 (2015).

[3] The Patents Act, No. 39 of 1970, INDIA CODE §5(a)-5 (2005), vol. 15, available at http://indiacode.nic.in.

[4] Id. at §53.

[5] Janice M. Mueller, The Tiger Awakens: The Tumultuous Transformation of India’s Patent System and the Rise of Indian Pharmaceutical Innovation, 68 U. Pitt. L. Rev. 491, 536-37 (2007) (“India has been a net exporter of drugs since 1988-89 . . . .”).

[6] Id. at 532-42.

[7] Office of the U.S. Trade Rep., 2016 Special 301 Report 38-39 (2016).

[8] Id. at 39.

[9] Evergreening “is when a company manufactures a product for which it secures a patent.  Shortly before the expiration of that patent, the company files a new patent that revises or extends the terms of protection . . . . [Evergreening] is a method by which technology producers keep their products updated, with the intent of maintaining patent protection for longer periods of time than would normally be permissible under the law.”  Uttam K. Shukla, ‘Ever Greening’ Patents, SCI. REP., Aug. 2011, at 31.

[10] Patents Act, 1970, § 3(d), amended by Patents (Amendment) Act, 2005.

[11] Javier Esparza, Indian Patent Law: Working Within the TRIPS Agreement Flexibilities to Provide Pharmaceutical Patent Protection While Protecting Public Health, 24 J. Transnat’l L. & Pol’y 205, 221 (2014-15).

In re Cuozzo Speed Techs., LLC, 793 F.3d 1268 (Fed. Cir. 2015)

By Samantha Leiner

Facts:  In 2002, Giuseppe A. Cuozzo applied for a patent covering a speedometer that shows a driver when he is driving above the speed limit.  Essentially, the invention encompasses a white speedometer needle that turns red when it passes under a translucent piece of red glass (or equivalent, say red cellophane).  If you attach the piece of red material to a speedometer beginning at 65 mph, then the white needle will look red when it passes that speed.  The invention includes attaching the red glass to a rotating plate, attaching the plate to the speedometer, connecting the plate to a GPS receiver, and entering onto a chip or a disk all the speed limits on all the US roads.  Thus, the GPS receiver can signal where the car is, the chip or disk can signal the speed limit at that location, and the plate can rotate to the right number turning the white needle to red, signaling to the driver that he or she is going over the speed limit.  The PTO granted the patent in 2004.  Giuseppe assigned the patent to the current petitioner, Cuozzo Speed Technologies, LLC.

In 2012, Garmin filed a petition seeking inter partes review (IPR) of the Cuozzo Patent’s 20 claims.  Garmin alleged claim 17 was obvious in light of 3 major patents (the Aumayer patent, Patent No. 6,633,811; the Evans patent, Patent No. 3,980,041; and Wendt patent, Patent No. 2,711,153).  The Board agreed to reexamine claim 17, as well as claims 10 and 14 because, even though Garmin did not expressly challenge claims 10 and 14 on the same obviousness ground as claim 17, the Board believed “claim 17 depends on claim 14 which depends on claim 10,” and therefore, Garmin had “implicitly” challenged claims 10 and 14 on the same prior art. The Board reasoned that anyone with more than an “ordinary skill” and “ordinary creativity” – could have taken the approach in the Aumayer patent and applied it to the Evans and Wendt patents.  The Board denied Cuozzo’s proposed amendments to the claims because it believed the amendments would not cure the obviousness issue.  The Board canceled claims 10, 14, and 17.

Cuozzo appealed to the Fed. Cir. and argued the PTO improperly instituted the IPR because Garmin had not challenged claims 10 and 14 “with particularity” as the statute requires for petitions. § 312(a)(3).  Cuozzo further argued the Board improperly used the “broadest reasonable construction” standard set forth in the PTO’s regulations (37 C.F.R. § 42.100(b)), when it should have applied the standard courts normally use when judging a patent’s validity (the “ordinary meaning [of the claims] . . . as understood by a person of skill in the art”). Phillips v. AWH Corp., 415 F.3d 1303, 1314 (Fed. Cir. 2005).  A divided panel of the Fed. Cir. rejected both arguments.  First, the majority pointed out that § 314(d) made the decision to institute an IPR “nonappealable.”  Second, the majority affirmed the application of the “broadest reasonable construction” standard because the regulation is reasonable, and a lawful, exercise of the PTO’s statutorily granted rulemaking authority.

Issues:  The Court looked at two of the issues presented the Fed. Cir.: (1) Whether § 314(d) precludes a court from reviewing if the PTO wrongly decided to institute IPR, when it did so on grounds not mentioned by the third party’s request for review; and (2) Whether § 316(a)(4) authorizes the PTO to issue a regulation that states the Board, in an IPR, must use a “broadest reasonable construction” standard to determine the validity of the reviewed patent’s claims.

Holding: The Court affirmed the Fed. Cir.’s opinion that the PTO’s decision to institute IPR is nonappealable based on § 314(d), and that § 316(a)(4) authorizes the PTO to use the regulation declaring the Board must use a “broadest reasonable construction” standard when determining validity of patents in IPR.

Analysis:  The Supreme Court majority rejected Cuozzo’s argument that the PTO’s decision to institute the IPR is appealable because the PTO unlawfully reviewed claims that were not stated “with particularity.”  First, the Court rejected the above argument because the statute states “determination by the [PTO] whether to institute [IPR] under this section shall be final and nonappealable.” § 314(d).  Second, the Court rejected Cuozzo’s above argument because, even though § 312 states a petition must be plead with particularity, § 314(d)’s language “must, at the least, forbid an appeal that attacks a ‘determination . . . whether to institute’ review by raising [the] kind of legal question” if the PTO should have only heard the claims that were plead with particularity or can hear any claims that “rise and fall” with a pleaded claim.   Third, the Court rejected the above argument because holding otherwise would be contrary to congressional intent of passing § 314(d).  The Court stated Congress specifically gave the PTO power to revisit earlier patent grants.  The Court doubted Congress intended to grant the PTO this power if it thought the PTO’s final decision could be undone by a minor statutory technicality related to the decision to institute IPR.   Further, the Court determined the existence of similar provisions in this, and related patent statutes reinforces its conclusion.  See §319 (limiting appellate review to the “final written decision”); §312(c) (2006 ed.) (repealed) (the “determination” that a petition for IPR “raise[s]” a “substantial new question of patentability” is “final and non-appealable”); see also §303(c) (2012 ed.); In re Hiniker Co., 150 F. 3d 1362, 1367 (Fed. Cir. 1998).

The Court majority then looked at and rebutted Alito’s dissent, as well as the Fed. Cir. dissent.  The dissent would limit the “No Appeal” provision to interlocutory appeals, making the court free to review the decision to institute an IPR in the context of the PTO’s final decision.  Post, at 1, 5 (ALITO, J., concurring in part and dissenting in part); In re Cuozzo Speed Tech., LLC, 793 F. 3d, at 1291 (Newman, J., dissenting).  The majority rejected this interpretation of § 314(d) because the Administrative Procedure Act already limits review to final agency decisions (5 U.S.C. § 704) and the decision to institute an IPR is a “preliminary” decision, not a final one.  Additionally, the PTO’s decision to deny a petition to institute IPR is discretionary.  See § 701(a)(2); §314(a) (no mandate to institute review).  The dissent argued it’s approach is “familiar practice,” and is consistent with other areas of law.  However, the majority reasoned the kind of initial determination here – “that there is a ‘reasonable likelihood’ that the claims are unpatentable on the grounds asserted” – are similar to decisions in other contexts where the Court has held to be unreviewable.    The Court majority then argued even though there is a strong presumption in favor of judicial review, the presumption may be overcome by “‘‘clear and convincing’’ indications, drawn from ‘specific language,’ ‘specific legislative history,’ and ‘inferences of intent drawn from the statutory scheme as a whole,’ that Congress intended to bar review.” Block v. Community Nutrition Institute, 467 U. S. 340, 349–350 (1984).  The majority believes the standard from Block is met here.  The dissent disagreed and pointed to Lindahl v. Office of Personnel Management, 470 U. S. 768 (1985) to support its view that, in light of this presumption, § 314(d) should be read to permit judicial review of any issue bearing on the PTO’s preliminary decision to institute IPR.  The Supreme Court in Lindhal held that a statute that makes decisions from an agency “final,” “conclusive,” and “not subject to review,” barred a court from revisiting the factual underlay of the determinations but allowed review when the agency “substantially depart[ed] from important procedural rights.”  The majority rejected the argument saying their interpretation is in accords with Lindhal because the statute states the decision is final and nonappealable.

The Court limited its interpretation of § 314(d) so it applies “where the grounds for attacking the decision to institute [IPR] consist of questions that are closely tied to the application and interpretation of statutes related to the [PTO’s] decision to initiate [IPR].” See §314(d).  The Court emphasized it is not, and does not, “decide the precise effect of §314(d) on appeals that implicate constitutional questions, that depend on other less closely related statutes, or that present other questions of interpretation that reach, in terms of scope and impact, well beyond ‘this section.’” Cf. Johnson v. Robison, 415 U. S. 361, 367 (1974); Traynor v. Turnage, 485 U. S. 535, 544–545 (1988).

The Court majority rejected Cuozzo’s argument that the PTO lacked the “legal authority” to issue a regulation requiring the PTO, when conducting an IPR, to give a patent claim “its broadest reasonable construction in light of the specification of the patent in which it appears,” for many reasons. 37 CFR §42.100(b).  Section 316(a)(2) grants the PTO authority to issue “regulations . . . establishing and governing [IPR] under this chapter.” §316(a)(4).

First, the Court majority interpreted Congress’ grant of rulemaking authority to the PTO in light of Chevron U.S.A., Inc. v. natural Resources Defense Council, Inc., 467 U.S. 837 (1984).  The Court in Chevron U.S.A. held when a statute is clear, the agency must follow the statute.  Id. at 842-843.  However, where a statute leaves “gaps” or is “ambiguous,” the court typically interprets it as granting the agency leeway in enacting rules and regulations that are reasonable in light of the text, nature, and purpose of the statute.  United States v. Mead Corp., 533 U.S. 218, 229 (2001); Chevron U.S.A., Inc., 467 U.S. at 843.  Here, the statue creates such a gap because the statute does not contain a rule regarding what standard the PTO must use.  Additionally, the statute even expressly grants the PTO the authority to issue rules and regulations “governing [IPR].” § 316(a)(2).  The dissent in the Fed. Cir. and Cuozzo both believed other “tools of statutory interpretation,” such as INS v. Cardoza-Fonesca, 480 U.S. 421, 432, and n. 12 (1987), lead to a conclusion Congress did not intend to impart rulemaking authority to the PTO.  The Court majority held § 2(b)(2)(A) does not contain the Circuit’s claimed limitation to proceedings, nor is its language the same at § 316(a)(2).  Section 2(b)(2)(A) grants the PTO the authority to issue regulations, “which . . . shall govern . . . proceedings in the Office,” but the statute before us, §316(a)(4), does not refer to “proceedings” but more broadly to regulations “establishing and governing [IPR].” 

Next, Cuozzo argued the Court must review the purpose of IPR, which, in Cuozzo’s view, is to modify the previous reexamination procedures and to replace them with a “’trial, adjudicatory in nature.’”  Cuozzo pointed out a decision to cancel a patent normally has the same effect as a district court’s determination of a patent’s invalidity.   Therefore, according to Cuozzo, Congress’ intended that IPR was designed as a “surrogate for court proceedings,” therefore it would also be Congress’ intent that the agency use the same claim construction standard as the district courts.   The Court majority reasoned the problem with Cuozzo’s argument is that an IPR is more like a specialized agency proceeding, and less like judicial proceedings because parties who initiate the IPR need not have a concrete stake in the outcome nor constitutional standing to bring a petition.  Additionally, challengers do not need to remain in the proceedings.  Further, the PTO may intervene in judicial proceedings regarding its final IPR decision to defend it position.  The burden of proof is different in an IPR than in district courts: in an IPR, the challenger (or the PTO) must establish unpatentability “by a preponderance of the evidence”; in district court, a challenger must prove invalidity by “clear and convincing evidence.”  These features combined, as well as the predecessors to IPR, show the purpose of an IPR is not the same as the purpose of district court litigation.  The purpose behind an IPR is reexamination, even though the phrase reexamination was changed to review.  The Court further considered that no statutory language, purpose, or history shows Congress intended to consider what standard the PTO must use during the reexamination of a patent.

The majority concluded the PTO’s regulation, 37 C.F.R. § 42.100(b), is a reasonable exercise of the PTO’s rulemaking authority granted by Congress.   The Court held using the “broadest reasonable construction” standard is reasonable because it helps to ensure the PTO is not granting patent exclusive rights to overly broad claims and the use of the standard encourages an applicant to draft the patent narrowly.    Additionally, past practice shows the “broadest reasonable construction” standard has been used by the PTO for more than 100 years.

Cuozzo made two arguments in response to the Court’s view that the standard is reasonable.  First, Cuozzo contended there is a difference between the PTO’s initial examination of an application to determine if a patent should issue, and an IPR, where the agency reviews an already issues patent.  In the initial examination of the application, the patent examiner uses the broadest reasonable construction standard and may reject the claims for being overly broad, then the applicant may present amendments to narrow the claims.  Cuozzo pointed out that examination both protects the public from overly broad claims and gives the applicant a fair chance to draft an amendment to the claims so the application will qualify for protection.  In an IPR, the broadest reasonable construction standard may help protect public interests, but there is no absolute right to amend any of the challenged claims.  Cuozzo stated an IPR is unfair to the patent holder.  The Court rejected Cuozzo’s argument that an IPR is unfair to patent holders because in an IPR, the patent holder may make a motion to amend the claims at least once in the process, just like he or she would in the original examination process.  Cuozzo then argued only 5 out of 86 motions to amend have been granted.  However, the Court rejected the argument stating the low numbers “may reflect the fact that no amendment could save the inventions at issue.”  The PTO rejected Cuozzo’s motion to amend because the proposed amendments “enlarge[d],” rather than narrowed the challenged claims.

Second, Cuozzo argued the use of the broadest reasonable construction standard in an IPR and the use of the ordinary meaning standard in the district court may cause inconsistent results and added confusion because a district court may find a patent valid, and then the PTO can later find the patent invalid under a different standard.  The Court rejected the argument because, even if it is correct that a district court can find the patent valid and the PTO find it invalid later on, this possibility has been present for a long time in the patent system, which provides different tracks for the review and adjudication of patent claims – one in the PTO and one in the courts.

Finally, Cuozzo presented various policy arguments in favor of an ordinary meaning standard.  However, the PTO is legally free to accept or reject policy arguments based on its own analysis.  Because the PTO clearly decided the best policy was to adopt the broadest reasonable construction standard, the issue of a better alternative standard is one Congress left to the PTO to decide.

Dissent:  Justice Alito wrote the dissenting opinion, in which Justice Sotomayor joins.  Alito and Sotomayor concur with the majority’s position on the “broadest reasonable construction” standard, but disagreed on the appealability of the PTO’s decision to institute IPR. The dissent does not think Congress intended to shield the PTO from compliance or noncompliance with the limits of strict scrutiny.  Because there is a strong presumption favoring judicial review, the dissent believed Congress required that judicial review, including of issues bearing on the institution of patent review proceedings, be channeled through an appeal from the agency’s final decision.

The dissent disagreed that the decision is nonappealable because the statute says so.  The dissent argued “Congress rarely intends to prevent courts from enforcing its directives to federal agencies. For that reason, this Court applies a ‘strong presumption’ favoring judicial review of administrative action.” Mach Mining, LLC v. EEOC, 575 U. S. ___, ___ (2015) (slip op., at 4) (quoting Bowen v. Michigan Academy of Family Physicians, 476 U. S. 667, 670 (1986)).  The dissent claimed that, even though the strong presumption of judicial review is rebuttable, “the agency bears a ‘heavy burden’ in attempting to show that Congress ‘prohibit[ed] all judicial review’ of the agency’s compliance with a legislative mandate.” Mach Mining, supra, at ___ (slip op., at 4–5) (quoting Dunlop v. Bachowski, 421 U. S. 560, 567 (1975)).  Essentially, the dissent believed if a provision can be reasonably read to permit judicial review, it should be.  The dissent took the view that the courts cannot stop the proceeding (IPR) from going forward, the issue of whether it was lawful to institute review will not escape judicial scrutiny.

The dissent further disagreed that allowing judicial review “would undercut one important congressional objective, namely, giving the [PTO] significant power to revisit and revise earlier patent grants.” The reasoning is that this would give the government cause to do away with judicial review whenever the government thinks review makes it harder for an agency to carry out important work.  The dissent believed § 319 is not limited to the PTO’s final written decision because the statute does not restrict what issues may be raised on appeal.  The dissent argued a party may be dissatisfied with the final written decision because the PTO lacked authority to institute an IPR in the first place.

The dissent explained that because the decision to institute an IPR is appealable (by their beliefs), that does not mean that courts must (or should) throw out an IPR decision whenever there is some technical deficiency in the challenger’s petition or in the PTO’s institution decision.  Additionally, normal limits on judicial review still apply such as prejudicial error.  The dissent then revealed doubts on whether Cuozzo would even prevail at the Court of Appeals because claim 17 rises and falls with claims 10 and 14, but this does not mean that his arguments are not worthy