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

Prior Use Rights v. Patent Protection

By Julie Shursky

Before the enactment of the Leahy-Smith America Invents Act (“AIA”), the prior user rights defense was limited to business method patents.  35 U.S.C. § 273 (2006) (restricting the defense to patent claims for “a method of doing or conducting business”), amended by Leahy-Smith America Invents Act, Pub. L. No. 112-29, sec. 5(a), 125 Stat. at 297.  The AIA, however, amended the language of Section 273, such that the defense is now applicable to any “process” or any “machine, manufacture, or composition of matter used in manufacturing or other commercial process.”  35 U.S.C. § 273(a) (2011).  Further, Section 273 states that an accused infringer must prove, by clear and convincing evidence, that the patented subject matter was “commercially used” in the United States at least a year prior to the effective filing date of the claimed invention.  35 U.S.C. § 273(a)(2).  This expanded prior user rights defense under the AIA applies to any patent issued on or after September 16, 2011.  Pub. L. No. 112-29, sec. 5(c), 125 Stat. 284, 299 (2011).  To qualify for the defense, the accused infringer must establish strict requirements that limit the defense’s applicability to very rare situations:

  • The use must be a good faith commercial use in the United States. Since the commercial use must be in the United States, some foreign commercial activity will not qualify.
  • The use must occur at least one year before the earlier of (1) the effective filing date of the asserted patent; or (2) the date on which the claimed invention was disclosed to the public in a manner that qualified for the prior art exception from under AIA. 35 U.S.C. 102(b); 35 U.S.C. 273(a), (e)(2) & (4).
  • The use must be in connection with (i) an “internal commercial use” or (ii) an arm’s length sale or transfer of a useful end result of the internal commercial use. 35 U.S.C. § 273(a)(1).

The AIA also sets forth several important limitations to the defense:

  • The prior commercial use defense is “personal,” which means it cannot be separately licensed, transferred, or assigned to a third party, except that the defense can be transferred as part of a good faith transfer of an entire business or relevant line of business.
  • In the event that the defense is transferred as part of such a good faith transfer, the defense may only be asserted for use at sites where the use occurred prior to the later of the date of the transfer or the effective filing date of the claimed invention. If the purchaser begins practicing the commercial use at the new sites after the effective filing date and after the transfer takes place, those uses will not qualify for the defense.
  • The defense is not a “general license,” which means that it does not provide a general license to all the claims of the asserted patent. For example, if a party qualifies for the defense, but only has practiced claims 1-5 of a patent, that does not mean the party can also practice claims 6-10 of the same patent without being liable for infringement.
  • The defense is not available if the commercial use is derived from the patentee or persons in privity with the patentee.
  • If the commercial use is abandoned, the defense may not be relied upon with respect to activities that occur before the abandonment. Certain legislative history, however, suggests that processes that are used periodically or seasonally may still qualify for the defense (i.e., the periodic or seasonal use does not render them abandoned), even though they are not continuous.

Although the prior user rights defense under the AIA is a powerful tool to defend against patent infringement claims, there is a caveat to the defense, which is that the accused infringer must maintain sufficient records of its prior use.  The records should be detailed enough to preserve the defense with respect to each claim that may be asserted.

 

Since the law is new, there is a lack of clarity on limitations, such as the ability of the prior user to expand the capacity of the use, the ability to implement improvements, the requirements of the continuousness of the use, and what constitutes a “commercial use” as required under the statute.  The intention behind the prior user defense, however, is not only to provide for fairness to a prior inventor, but also to boost the rights of a trade secret holder against the rights of a later patent holder.  See 157 Cong. Rec. S5319 (daily ed. Sept. 16, 2011) (statement of Rep. Smith).  Specifically, the sponsors of the AIA intended to broaden the amendment in order to insulate businesses from having to disclose their internal processes or manufacturing materials.  See, e.g., 157 Cong. Rec. H4483 (daily ed. June 23, 2011) (statement of Rep. Smith) (“The prior-use defense is not overly expansive and will protect American manufacturers from having to patent the hundreds or thousands of processes they already use in their plants.”); 157 Cong. Rec. S5426 (daily ed. Sept. 8, 2011) (statements of Sen. Blunt and Sen. Leahy) (discussing that “the prior user rights provided under section 5 of H.R. 1249 will allow developers of innovative technologies to keep internally used technologies in-house without publication in a patent”).  Therefore, a major driving factor behind broadening the prior-user defense was to shield manufacturers who owned trade secrets from subsequent patent-infringement claims.

 

 

Summary on the Supreme Court’s Recent Kirtsaeng Decision

By Samantha Leiner

The Supreme Court released its decision regarding the case Kirtsaeng v. John Wiley & Sons, Inc., 579 U. S. ____ (2016, in June.  This case deals with what factors a district court is supposed to look at when awarding or rejecting attorneys’ fee under the Copyright Act Section 505. 17 U.S.C. § 505.  The original infringement issue was decided by the Supreme Court in 2013.  See Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. ___ (2013).

 

Kirtsaeng, a citizen of Thailand, came to the US to go to school at Cornell University.  He realized the same textbooks required for his class in the US were sold for a significantly cheaper amount back home in Thailand.  Kirtsaeng had family and friends buy the textbooks in Thailand and then sent the books to him in the U.S., where he sold them for a nice profit.  Wiley & Sons, the publishing company for the textbooks, sued Kirtsaeng for copyright infringement, claiming his activities violated the exclusive right to distribute under the Copyright Act.  Kirtsaeng’s defense was the “first-sale doctrine,” which allows for the lawful owner of a copyrighted book to resell “or otherwise dispose of” the product as he wishes.  Wiley’s counter to Kirtsaeng’s defense is the “first-sale doctrine” does not apply when the book was manufactured abroad.   While this case was taking place, multiple courts were in conflict as to whether the “first-sale doctrine” applied to products manufactured abroad.  Even the Supreme Court in a previous decision was undecided on this issue in a 4-to-4 split of the Court. See Costco Wholesale Corp. v. Omega, S. A., 562 U. S. 40 (2010) (per curiam). Here, the district court sided with Wiley, as did a divided Second Circuit court.  However, the Supreme Court reversed in a 6-to-3 decision and determined the first-sale doctrine allows the resale of foreign-made books, just like domestic books.   Being victorious, Kirtsaeng went back to the district court to seek more than $2 million in attorneys’ fees from Wiley.  The district court denied the motion based on the reasoning that Wiley’s infringement claim was objectively reasonable, which the district court argued was in line with the Copyright Act’s purpose.  The Second Circuit affirmed the district court’s holding that attorneys’ fees would not be awarded due to the objective reasonableness of Wiley’s position in bringing the infringement suit.

 

The major issue presented to the Supreme Court was whether a court, in exercising its authority to award or deny attorney’s fees to the winning party, should give substantial weight to the objective reasonableness of the losing party’s position.

 

The Supreme Court found that a court, specifically a district court, should give substantial weight to the objective reasonableness of the losing party’s position.  However, the Court also held that district courts, when determining whether attorneys’ fees should be awarded, should also give weight to all other factors relevant in granting the motion for attorney’s fees, such as a party’s litigation misconduct or if the infringer has repeated offenses of infringement.  The Supreme Court further held that it is in a court’s discretion to order or deny attorneys’ fees based on these relevant factors.  Therefore, the Supreme Court vacated the decision and remanded back to the district court because the Justices were not sure whether the district court understood the full scope the discretion it holds.

 

The Supreme Court started its analysis by citing to Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994), a Supreme Court case where it decided two restrictions or limitations for courts to follow when determining whether attorneys’ fees should be awarded under the Copyright Act § 505.   The two restrictions/limitations on district courts are: (1) when a district court is determining whether to award attorney’s fees it may not “award [] attorney’s fees as a matter of court,” but on a case-by-case, more particularized basis, Fogerty, 510 U.S. at 533; and (2) the district court shall treat prevailing plaintiffs and prevailing defendants equally when determining a motion for attorneys’ fees, Id. at 527.   The Supreme Court in Fogerty noted with approval “several nonexclusive factors” to help a district court in deciding whether to award attorneys’ fees, while leaving open the possibility of additional guidance in determining attorneys’ fees: “frivolousness, motivation, objective unreasonableness[,] and the need in particular circumstances to advance considerations of compensation and deterrence.”  Id. at 534, n. 19.    Here, Kirtsaeng and Wiley disagree as to “what else [the Court] should say to district courts” about what to consider when awarding attorneys’ fees.  Kirtsaeng, 579 U.S. at 4.  Both Kirtsaeng and Wiley argue that the Supreme Court should hold that the district court should put “substantial weight” on certain factors in determining whether attorneys’ fees should be awarded, but Kirtsaeng and Wiley differ on what factors should be given substantial weight.  Wiley argues that the district court, in deciding whether to award the prevailing party attorneys’ fees, should put substantial weight on the objective reasonableness of a losing party’s position in bringing or defending the infringement case.  In contrast, Kirtsaeng’s position was that the court should give “special consideration to whether a lawsuit resolved an important and close legal issue and thus ‘meaningfully clarifie[d]’ copyright law.” Kirtsaeng, 579 U.S. at 5 (quoting Brief for Petitioner 36).

 

The Supreme Court agrees that there is a need for additional guidance surrounding an application of § 505.  The Court states that, even when a fee-shifting law does not state any explicit limits or conditions, the Supreme Court has “found limits” in the laws in order to give individuals a predictor as to how a fee-shifting decision will result.  Kirtsaeng, 579 U.S. at 6.

 

The Court explains that to find the right guidance for a determination of attorneys’ fees under § 505, it must look at whether Wiley’s position above or Kirtsaeng’s position above advances the Copyright Act’s goals.  The Supreme Court in Fogerty explained, “copyright law ultimately serves the purpose of enriching the general public through access to creative works.”  510 U.S. at 527.  Section 505 achieves that purpose “by striking a balance between wo subsidiary aims: encouraging and rewarding authors’ creation while also enabling other to build on that work.”  Kirtsaeng, 579 U.S. at 6 (citing Forgery, 510 U.S. at 526.  Therefore, attorneys’ fees should “encourage the types of lawsuits that promote the purposes of the Copyright Act.” Id.

 

The Supreme Court sided with Wiley because Wiley’s argument falls within the purpose of the Copyright Act, while Kirtsaeng’s argument does not “produce any sure benefits.” Kirtsaeng, 579 U. S. at 7.   The Supreme Court’s reasoning on rejecting Kirtsaeng’s argument is even if the case advances public interest, fee shifting does not always encourage possible litigation, but will most likely have a chilling effect on people bringing suits, especially those of public interest, based on the punishment of attorney’s fees.  Further accepting Wiley’s argument, the Supreme Court found putting substantial weight on reasonableness discourages a copyright holder from bringing a suit with no reasonable infringement claim or an infringer from bringing a defense with no reasonableness.  Discouraging infringement claims or defenses with no merit saves the courts and the parties time and money.  Additionally, Wiley’s argument supports Forgery because it does not discriminate between plaintiffs and defendants.

 

However, the Supreme Court decided reasonableness is only a “substantial factor” in determining whether attorney’s fees shall be awarded, not a controlling one.  The Court found other factors may be considered by the district court to determine whether attorneys’ fees should be awarded, such as a party’s litigation misconduct, “to deter repeated instances of copyright infringement,” or “overaggressive assertions of copyright claims.”  A party’s litigation misconduct can mean unduly delaying the case through discovery, filing unneeded motions, failing to produce important documents, etc. This means the victor may be awarded attorney’s fees even if the losing party’s position was reasonable.

 

Conclusion:

 

The Supreme Court found that a court, specifically a district court, should give substantial weight to the objective reasonableness of the losing party’s position.  However, the Court also held that district courts, when determining whether attorneys’ fees should be awarded, should also give weight to all other factors relevant in granting the motion for attorney’s fees, such as a party’s litigation misconduct or the repeated offenses by the infringer.  The Court further held that it is in a court’s discretion to order or deny attorneys’ fees based on these relevant factors.  Therefore, the Court vacated the decision and remanded back to the district court because the Justices were not sure whether the district court understood the full scope the discretion it holds.